Writer and humorist Mark Twain famously said of investing, “It’s not return on my money I’m interested in, it’s return of my money.” While the financial world may not be in as dire a circumstance as the cantankerous Mr. Twain alleged, we always need to consider the security of our principal as well as the income whenever an opportunity arises. As it happens, mortgages are a safe investment option for several reasons:
- Protection through equity. Most mortgage investment companies typically don’t exceed lending 70% of value of the property, which gives a 30% cushion of equity. At Earn11, we’re even more conservative than that: Our maximum is to lend 65%, which gives us a 35% cushion of equity. In other words, if a property is valued at $1 million, the most we will lend is $650,000. Not only does that provide leverage against default, it means the borrower has more skin in the game. This is also in stark contrast to the volatility of investing in the stock market, where you’re trusting that company’s books—and Wall Street analysts—are telling the whole story.
- You get paid first. Our agreement states that we don’t make money until you make your 11%. As a result, we have an enormous incentive to make sure that every loan is solid.
- Avoid the headaches of real estate ownership and management. This is pretty simple: If you buy an income property, it’s unlikely to go up 11% on average unless you get extraordinarily lucky. Plus, being a landlord (or hiring one) requires a significant investment of money, time, and energy that eats into your profitability.
- Professional due diligence. Mortgage lending is complex, but we make it simple for our investors. We appraise the property as well as hire an independent third-party firm to do so. We conduct the property inspections, research the title, and pay the title company to ensure that we have the first lien on the property. Finally, we underwrite the credit and the income on the borrower to ensure they can pay.
By doing due diligence both on the property and the borrower, we make sure mortgage investing is a safe option. In an upcoming article we’ll address the risk factors in mortgage investing and the strategies we use to reduce and mitigate them.