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Investing for Beginners: A Guide to Mortgage Note Funds for Alternative Income

by | Nov 13, 2024 | blog

Mortgage note funds offer a unique alternative investment for those seeking ways to diversify beyond stocks and bonds. These real estate-based assets allow investors to participate passively in the housing market without directly owning property. Whether you’re new to investing or looking to expand your portfolio, understanding mortgage notes could unlock a new opportunity for consistent returns.

 

How Do Mortgage Note Funds Work?

Mortgage note funds pool capital from multiple investors to acquire mortgage notes—essentially loans made to homebuyers. When you invest in these funds, you will receive a portion of the income generated as borrowers repay their loans- each fund structure is unique, and you will always want to do your due diligence on the sponsor! Unlike owning physical properties, these funds let you benefit from real estate without landlord responsibilities, offering a path to passive income and asset diversification.

You can learn about our fund structure at 7e Investments and gain insights into managing mortgage notes in our latest webinar: ABCs of Mortgage Note Investing Webinar

 

Benefits of Mortgage Note Investments

  • Diversification Beyond Stocks: These funds provide an opportunity to diversify outside traditional investments, with income linked to real estate instead of stock market fluctuations.
  • Predictable Cash Flow: Many funds offer regular distributions, creating a fixed income stream that may be more reliable than stocks.
  • Lower Volatility: Generally less volatile than stocks because they’re secured by physical assets, adding stability to your investment portfolio.
  • Real Estate Exposure Without Ownership Hassles: For those interested in real estate’s income potential without the responsibilities of property management, these funds offer an ideal alternative.

 

benefits of mortgage note investing

 

Key Risks to Consider

Like any investment, mortgage note funds carry potential risks. However, since these loans are typically purchased at a discount and secured by real estate, there is a level of protection in the event of housing market fluctuations. Here are the key risks to be aware of when investing in mortgage notes:

1. Market Risk: Economic downturns, or changes in housing market conditions can impact the value of underlying mortgage notes and repayment rates.

2. Credit Risk: Borrowers may default on their payments, leading to potential loss of income or additional costs associated with foreclosure and asset management.

3. Liquidity Risk: Mortgage notes are not as liquid as stocks or bonds, meaning it may be challenging to quickly convert your investment into cash.

4. Regulatory Risk: Mortgage note investments are subject to complex regulations that can vary by state and change over time. Changing regulations in the real estate and lending markets can affect fund operations, compliance costs, or limit certain investment strategies.

5. Operational Risk: The expertise and efficiency of the fund manager play a critical role. Ineffective management could lead to poor decision-making or operational inefficiencies.

6. Due Diligence Risk: If the fund’s due diligence processes are inadequate, the investor may end up investing in notes with poor performance potential or unforeseen legal issues.

Being aware of and managing these risks through comprehensive due diligence, careful selection, proper structuring, and ongoing monitoring is essential for success in mortgage note investing.

 

how 7e Investments approaches risk management with mortgage note funds

 

How to Get Started with Mortgage Note Funds

If you’re ready to explore these funds as part of your strategy:
  • Do Your Research: Look into various funds, their track records, fees, and performance.
  • Do Your Due Diligence: Don’t just invest without talking to the sponsor. Set up a call with them to get your questions answered.
  • Start Small: For beginners, allocating a small portion of your portfolio to these funds can build confidence without overcommitting. As you gain experience, you might increase your exposure. Look for Regulation A+ Funds if you are not an accredited investor.
how to get started with mortgage note funds

Final Thoughts

Mortgage note funds offer a unique way to add real estate exposure and passive income to your portfolio. Beginners might start small to ensure alignment with their financial plans. With the right approach, these funds can provide both diversification and income in an alternative asset class.
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For more on this topic check out 7e Investments resources below.
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