The liquidity of mortgage investments ultimately comes down to the liquidity of the underlying properties: Because there is no publicly traded market for mortgage fund investments, liquidity is relatively low. As a result, this type of investing requires a different mindset from stock trading, where you can sell in minutes. A mortgage fund will have a certain duration, generally three years, and investors are expected to hold their investment for that period.
That said, we recognize that an investor may want to liquidate their position. A provision in our private placement memorandum, for example, states if an investor needs money due to unforeseen circumstances, we’ll do everything we can to pay back the investment on what’s called a best-effort basis. (It can’t be guaranteed, because the lack of a public market may make it impossible to quickly liquidate.)
In such a scenario, there are several possible solutions. If there is enough cash in the fund, that money may be used to accommodate the request. Alternatively, we will attempt to find a different third-party investor willing to fund the position or try to execute a quick liquidation of the loan.
Note that publicly traded real estate investment trusts (REITs) are the exception to the rule when it comes to liquid investments in real estate. They can be sold quickly because they’re traded on the NYSE or Nasdaq. However, that comes at a price: The rates of return on REITs are low, normally in the range of 5%-8%. The premium paid by our firm–up to 11%–serves to compensate investors for the comparative lack of liquidity of mortgage investments.