Building Wealth with Mortgage Funds: Expert Tips and Insights

Ready to create wealth passively without the headache of becoming a landlord?

Mortgage funds just might be the answer you’re looking for. These investment vehicles are growing in popularity among savvy investors looking for regular returns without all the headaches of direct real estate ownership.

Here’s the thing…

If mortgage originations increase 28% to $2.3 trillion in 2025, the mortgage fund market could explode. The best part is that you can start with smaller amounts than going all-in with an investment property.

In this guide, you’ll discover:

• What Are Mortgage Funds and How Do They Work?
• The Benefits of Investing in Mortgage Funds
• Types of Mortgage Fund Strategies
• Choosing the Right Mortgage Fund
• Risk Management and Caveats to Consider

What Are Mortgage Funds and How Do They Work?

Mortgage funds are investment vehicles that pool together capital from a variety of investors to provide real estate loans.

These products are similar to mutual funds in that they pool together money from investors, but instead of buying stocks and bonds, mortgage funds invest in mortgages secured by real property. When you invest in a mortgage fund, your money gets combined with other investors’ capital to create a larger pool of assets.

This money is then used to:

• Finance residential mortgages
• Fund commercial real estate loans
• Provide short-term bridge financing
• Support property development projects

Fund managers use these pooled capital to originate or purchase mortgages, and investors earn returns from interest paid by the borrowers.

Sounds simple enough, right?

Here’s how you make money: As homeowners or property investors make their mortgage loan payments each month, the interest portion of the payments flows back to the fund. After management fees and expenses are taken out, the fund makes regular distributions to investors.

The Benefits of Investing in Mortgage Funds

So why are mortgage funds becoming so popular these days?

There are a number of reasons investors are jumping into this trend, especially given the current market environment.

Monthly Income Distributions

Stocks don’t always pay dividends, and when they do, it might only be once a quarter. Bonds typically only pay semiannual interest distributions.

Mortgage funds are a good choice for investors seeking monthly income distributions. With mortgage rates averaging 6.7% in 2024, mortgage funds are also positioned to produce some attractive returns for investors.

Lower Capital Required to Start Investing

Forget about needing hundreds of thousands of dollars to get started.

Quality mortgage funds, including the best mortgage fund Australia options, have low minimum investments of $5,000 or less to open an account.

Compare that to the capital requirements of buying an investment property where you need significant cash for down payments, closing costs, and ongoing maintenance.

Professional Mortgage Management

Underwriting mortgages is not easy. It requires in-depth knowledge of legal compliance, risk assessment, and property analysis.

If you’ve been managing your own mortgages or other real estate loans, you know how much work is involved.

Mortgage fund managers do all of this mortgage management for you. Fund managers have the:

• Systems and expertise to evaluate borrowers and assess creditworthiness
• Tools to analyze property values and market conditions
• Knowledge to navigate legal and regulatory requirements
• Processes to monitor loan performance and make collections as needed

Portfolio Diversification

When you invest in a mortgage fund, your money is spread across a large portfolio of loans and not tied to a single property or borrower.

This can dramatically reduce risk compared to making individual mortgage loans.

Different Types of Mortgage Fund Strategies

Mortgage funds are not created equal. It’s important to understand the differences between the various strategies available.

This will help you narrow down the funds that best fit your goals, risk tolerance, and return expectations.

First vs Mixed Mortgage Funds

First mortgage funds invest exclusively in first-position mortgages and offer lower risk and more conservative returns (usually 6-8% annually).

Mixed strategy funds make both first and second mortgages in an attempt to generate higher yields for investors. But keep in mind, this also increases risk as second mortgages get paid after first mortgages when loans go into default.

Commercial vs Residential Focus

Residential mortgage funds invest in loans secured by houses and small apartment buildings. Residential funds are generally more stable with lower risk, but that also means slightly lower returns.

Commercial mortgage funds focus on office buildings and larger multifamily rental properties. These funds typically offer higher returns but with more volatility.

How to Choose the Right Mortgage Fund

Selecting the right mortgage fund takes careful evaluation of several factors. Here’s what you need to look at:

Fund Management Experience

Seek out managers with a proven track record of successfully navigating through multiple market cycles with strong underwriting standards and transparent reporting practices.

Historical Performance

Look at consistency of distributions and how the fund performed during past economic downturns. Remember that past performance doesn’t guarantee future results.

Loan Portfolio Composition

Evaluate average loan-to-value ratios, geographic distribution, and types of properties in the fund’s portfolio. Diversification is key.

Liquidity Terms

Funds offer different liquidity provisions ranging from monthly redemptions to fixed investment terms. Choose based on when you might need to access capital.

Risk Management and What to Watch Out For

Like any investment, mortgage funds carry risks that you need to be aware of:

Interest rate risk is a major factor that can affect fund performance. Rising rates hurt property values and refinancing activity.

Credit risk is the possibility of borrowers defaulting on their loans. High-quality funds mitigate this through strong underwriting and conservative loan-to-value ratios.

Market risk means local real estate conditions directly impact performance. Recessions lead to higher defaults and declining property values.

Liquidity risk can be an issue if funds have limited redemption options. Understand when you can get your money out and any early withdrawal penalties.

Due Diligence Essentials

Before you invest, cover these due diligence areas:

• Management: Track record, experience, transparent reporting
• Fund structure: Fee structure, liquidity terms, minimum investments
• Portfolio quality: Loan diversification, geography, loan-to-value ratios
• Performance history: Historical returns, default rates, market downturns performance

Getting Started with Mortgage Fund Investing

First, decide how much of your portfolio you want allocated to mortgage funds as part of your overall investment mix. Advisors typically recommend 10-20% max in alternative investments.

Do your research and compare the different fund options with their unique strategies, performance, and fees. Consider starting with a smaller amount to dip your toes in the water.

Most importantly: Only invest what you won’t need immediate access to, since many mortgage funds have limited liquidity options.

Final Thoughts

Mortgage funds are a compelling way to participate in real estate markets without the headaches of direct property ownership. They can provide steady income and diversification benefits when done with proper due diligence and expectations in place.

Select quality funds with experienced management teams, conservative underwriting standards, and transparent reporting.

As with any investment, mortgage funds carry risk. But for investors seeking alternatives to stocks and bonds, they are a very attractive investment worth serious consideration. As the mortgage market continues to grow and evolve, those who position themselves in quality mortgage funds today could benefit from this expanding opportunity.