Comparison between mortgage investing and other fixed-income products

Individual mortgage investments are relatively small when compared to government or corporate bond issuance. For this reason it would be difficult for large institutional investors to put a lot of money to work into mortgages. Therefore, the mortgage market is left to smaller investors who also have the expertise to distinguish good mortgage investments from bad ones. It turns out that the universe of such investors is fairly small compared to the universe of borrowers who are seeking private money loans. The combination of limited supply and high demand results in a high price‚ in other words, a high yield for mortgage investors. Additionally, many investors place a high value on liquidity ‚i.e. being able to sell investments quickly and convert them into cash. Corporate and government bonds are some of the most liquid investments in the world. Mortgage investments on the other hand cannot be converted into cash quickly. This lack of liquidity contributes to the higher yield of mortgage investments.  The risk adjusted returns of mortgage investments are very attractive. That being said, there is no such thing as a free lunch. First of all these investments are not liquid and therefore cannot be converted into cash quickly. Secondly, there is real risk involved, the most obvious of which being that the borrower defaults and the lender cannot sell the home for more than the amount of the loan. To a great extent this risk can be mitigated by properly valuing the property and structuring the deal with a high enough margin of safety.

There is also the possibility of unanticipated legal disputes involving the property, the navigation of which could easily destroy investment returns. It is necessary to have advisors with relevant experience should a situation such as this arise. Furthermore, while there are safeguards in place to protect against fraud, real estate transactions are susceptible to unscrupulous individuals looking to take advantage of unsophisticated lenders. Realizing the superior risk adjusted returns offered by mortgage investing is not for the faint of heart and requires a certain level of sophistication. That being said, investing in mortgages can be done in a safe manner. The investor needs to be armed with the proper knowledge and to take care in crafting each investment including conducting the proper financial analysis and thorough due diligence.


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