Private mortgage investments are gaining popularity as more borrowers seek alternative financing solutions and investors recognize the advantages of this asset class. These unique investments offer several portfolio-enhancing features, from higher potential returns and consistent income to diversification and reduced volatility, making them an appealing option for those looking to strengthen their financial strategies. Private mortgage investments also naturally complement traditional assets like stocks and bonds, enhancing the overall resilience and growth potential of a diversified portfolio.
What Is Involved in Private Mortgage Investing?
Private mortgage investing involves lending money to individuals or businesses for real estate purchases or refinancing, where the investor acts as the lender instead of a traditional bank. In return, the investor earns interest on the loan. Private mortgages are typically short-term and involve higher interest rates. The real estate backing these mortgages serves as collateral, offering a layer of protection against losses in case of default.
In terms of structuring private mortgage investments, there are two main approaches: whole mortgage investing and mortgage investment corporation funds.
Whole Mortgage Investing
In a whole mortgage investment, the investor funds an entire mortgage loan, taking on all the associated risks and rewards. The investor holds the full mortgage note and receives all the interest payments.
Mortgage Investment Corporations (MICs)
MICs pool money from multiple investors and spread it across various mortgages and properties, which helps to diversify and mitigate risk. MICs offer shared risk across a wider portfolio.
It is important for investors to understand fully the differences between these two approaches. Whole mortgage investing offers more control and potentially higher returns but carries more risk, while MICs provide diversification and professional management, reducing exposure to individual mortgage defaults.
Chris Baker, Vice President of Investment Sales at CMI Mortgage Investments, notes: “Private mortgage investments can be customized to fit an investor’s needs, providing a unique opportunity to enhance any portfolio. Regardless of your investment goals and investment style, there is a private mortgage investment option to suit your needs, preferences and risk tolerance.”
Comparison to Traditional Investments
Private mortgages offer features that differ from traditional investments, which is why they are such a valuable addition to even a diversified portfolio. Compared to stocks, private mortgages generally exhibit lower volatility and offer more consistent returns. Stocks can fluctuate widely due to market conditions, investor sentiment, and economic shifts. In contrast, private mortgages provide consistent income in the form of monthly interest payments, which can be beneficial during market downturns.
Compared to bonds, private mortgages typically offer higher returns because they involve a higher risk profile. While bonds are traditionally seen as a safer investment, they are sensitive to changes in interest rates. When interest rates rise, the value of existing bonds often decreases, which can erode returns for bondholders. Private mortgages, on the other hand, are less influenced by interest rate changes.
Historically, private mortgages have provided higher returns than traditional fixed-income investments, such as bonds, making them attractive when returns on traditional assets decline.
Additionally, unlike other investments that rely on the performance of companies or market conditions, private mortgages are backed by tangible real estate assets. Investors hold a claim on the property, which can help reduce or eliminate losses in situations where the borrower defaults. This real estate asset backing provides some protection for private mortgage investors.
Benefits of Private Mortgage Investments
Adding private mortgages to an investment portfolio introduces an alternative asset class that provides diversification away from traditional stocks and bonds.
Private mortgage investments are not influenced by the same factors as traditional investments, offering non-correlated returns that are valuable during economic uncertainty. They are less susceptible to stock market fluctuations, bond market changes, monetary policy shifts, or business cycle variations. As a result, private mortgages enhance portfolio diversification, reducing overall risk by investing outside traditional asset classes and industries.
Additionally, private mortgages provide regular income from interest payments, which can be especially appealing for investors seeking reliable cash flow.
Private mortgages generally offer higher yields compared to traditional fixed-income investments. For instance, while government bonds may offer yields in the range of 2 to 3%, private mortgages can offer returns of up to 16%.
One of the most attractive aspects of private mortgage investing is that these investments are backed by real estate assets, which act as collateral. In case of borrower default, the investor has a claim on the property, reducing the risk of total loss.
Private mortgage investments offer a unique opportunity for those looking to diversify their portfolios and earn regular passive income without the complexities of direct property ownership. By acting as private lenders, investors can avoid the risks, management and maintenance responsibilities, and overhead costs typically associated with real estate investments.
Enhancing Portfolio Performance
Including private mortgages in a portfolio can potentially increase overall returns. However, private mortgages can offer additional performance-enhancing benefits to your portfolio, beyond simple returns.
As Chris Baker explains, “Mortgage investments offer a strategic way to enhance portfolio consistency and returns. By incorporating these investments, you can benefit from strategic diversification, earn regular passive income, and elevate potential returns, while reducing volatility and hedging against inflation through real estate-backed assets.”
Private mortgages can provide regular income during economic downturns, acting as a buffer against uncertainty and market volatility. For example, during the 2008 financial crisis, while traditional asset classes such as stocks and bonds suffered, private mortgages continued to deliver regular income to investors. This ability to generate income during turbulent times makes private mortgages an effective tool for portfolio risk management.
By adding private mortgages, investors can balance risk and return, as private mortgages can improve risk-adjusted performance by diversifying the risk profiles within a portfolio. They offer a different risk profile from traditional assets, which can reduce overall portfolio risk and improve risk-adjusted returns. A portfolio that invests a portion of the fixed income allocation into private mortgages is more likely to show reduced volatility and improved returns, compared to a portfolio with only stocks and bonds.
Practical Considerations for Investors
Understanding the potential for borrower defaults and real estate market fluctuations is key to making informed investment decisions.
As with any investment, due diligence is crucial when investigating private mortgages. Private mortgage investing can add value, but it is important to assess and mitigate risks thoroughly. Investors should also be aware that not all private mortgage investment products or providers are equal. As Chris Baker suggests, “Investors should not only look at potential returns but also assess the company’s track record in managing risk and navigating difficult markets, as these factors can significantly impact long-term success.”
When evaluating private mortgage investments, consider target returns, investment terms, and associated risks. Choose a private mortgage investment company carefully.
Professionally Managed Mortgage Investments
Working with a full-service mortgage investment provider can simplify the investment process and enhance returns. Reputable companies like CMI, with their in-house mortgage administration team, CMI Mortgage Services, provide a significant advantage to investors.
CMI handles everything, including repayments, borrower communication, and any unforeseen issues. They ensure compliance with regulatory requirements and use integrated software solutions for efficient investment management. CMI provides ongoing quality control reviews throughout the entire term of the investment.
Partnering with CMI provides access to professionally managed investments, including curated whole mortgage opportunities as well as a suite of diversified mortgage investment portfolios, enhancing investment security and performance. Private mortgage investments are an ideal way to enhance any portfolio. CMI helps investors achieve their goals, simplify their investments, and reduce their risks through rigorous, streamlined processes, so investors can enhance their portfolios with less stress.
With nearly $3 billion in mortgage placements across Canada, CMI Financial Group has a strong track record that showcases its extensive experience and success in the industry and provides investors with peace of mind.