If you’re interested in investing in mortgages, the following are a few of the options—and why you should (or shouldn’t) consider them:
Invest through a mortgage investment company. This route to investing in mortgages has a couple of advantages. While all you have to do is write a check to earn up to 11% on your investment, the companies are responsible for cultivating the opportunities and doing all the hard work, such as getting title insurance and doing the underwriting, vetting of credit, and background checks—as well as managing the ongoing relationships and finances. Another advantage is that these are pooled investments, which offer downside protection: If one of the borrowers stops paying, you’re still in good shape.
Find an electronic exchange and buy a mortgage on the open market. Although this sounds good in principle, there’s a major flaw: You don’t know what you’re buying or who from, you don’t have good visibility on the process, and you don’t have the opportunity to really vet a client that you do in regular life. (It’s also important to note that this is not a big industry and it’s hard to hunt down an appropriate opportunity.)
Invest through a publicly traded mortgage REITs. Like the electronic exchanges, these sound good in principle. What’s the problem? They generally don’t pay good rates (anywhere between 5% to 7% percent in current market conditions) and they’re typically have much higher loan-to-value (LTV) rates. That makes them inherently riskier, as well as the fact that they’re traded like stocks on the exchange.
Sell a piece of real estate and do a carryback loan. This is the do-it-yourself version of mortgage investing: Own a piece of property, sell it, and service the loan. It can be lucrative if the stars align just right. However, you’re taking on all the risk and hard work, and you’re still a landlord. Moreover, you also have all of your eggs in one basket unless you have a diverse portfolio of properties. Finally, if the borrower stops making payments, you’re in for a tough legal road as well as a financial one.