GLOOM DOOM AND OTHER POSITIVE SIGNS

The trouble with gloom and doom is that when you’re surrounded by it, that’s all you can see. While most economists don’t predict a depression, the prevailing thought is that we’re in for a very bad recession with lots more foreclosures, job losses and many personal and business bankruptcies.

I’m not going to express my views about the insanity in Washington regarding the financial market and the Detroit bailouts. I will say the new President sure has inherited a mess (some would say it’s a crime scene). His hands are full but I think he’s got the moral support of the general population and I wish him (and all of us) the best. On the bright side, if history teaches us anything it’s that this, too, shall pass. Everything changes, nothing is static. If you don’t like what you’re seeing right now, just wait a minute, it’ll change.

I’ve been telling anybody that’ll listen that it’s time to buy real estate. Great deals are made when the market is in the tank and everyone is trying to sell. In the residential market, the number of home sales is increasing but prices are still flat or falling, although at a much slower pace. This is a sign that we’re at or close to the bottom of the current real estate market cycle. Another sign of a market bottom is to look at who’s buying houses these days, and who are the sellers. In housing it’s mostly investors buying property directly from the banks.

I’ve been getting lots of calls lately from Realtors who know of commercial property owners in big trouble and need to sell. It’s definitely a buyer’s market and cash is king. We’re always looking for more great deals as we raise capital to make it happen. The market will probably slide along the bottom for all of next year before signs of life become evident, if then. However, until there is liquidity in the lending market, nothing will change. Since banks and other commercial lenders are not making loans these days, motivated owners have become much more willing to hold a mortgage with great terms.

The bottom line is, there’s lots of blood in the streets, with more to come, but the darkest hour is just before dawn. Sure, the market may languish for a while but when the recession ends and liquidity is restored to the financial markets, real estate prices will begin moving up again. And don’t forget, we’ll be seeing massive inflation in the next year or so. You can’t print dollars like the Fed has in the last couple of months (and will continue to do in it’s battle to restore liquidity and end the recession) without increasing inflation. When inflation is on the rise, you’ll want to be in assets that move with inflation, like real estate. Buy at today’s super low prices and watch your wealth grow as inflation does its thing.

Take a look at the market cycle chart in my blog www.dougmitchell123.blogspot.com to get an idea of where we are in the current real estate cycle and where the market will head as the economy recovers. The cycles usually repeat about every six to ten years, but because of the extent of the mess the economy is in right now, and Congress being clueless about what to do, I think this one will be long in duration. Remember, the time to buy anything is when everyone else selling, whether it’s real estate, stocks, cars, whatever. Those who move against the crowd now will be tomorrow’s millionaires. It happens in every recession and it’s happening again now. You can bet on it.

 

Mortgage Pools – Jump In, The Water’s Fine

I often get questions from potential investors about the basic functions of a mortgage fund (aka a mortgage pool). Therefore, I’ve decided to write about mortgage pools in general to clear up any misconceptions.

Mortgage pools are securities that are required by state and federal agencies to provide complete and full disclosure through an offering memorandum. A mortgage pool is a collection of capital contributions from many investors and is usually in the form of a limited liability company that sells shares. The investment pool of capital is then used to purchase a number of different loans, which are commonly called mortgages or trust deeds, and secured by real estate.

There are basically three ways to invest in mortgages, and regardless of a person’s real estate or investment acumen, there is a mortgage investment option available today that fits their investment portfolio. The three ways are: funding a mortgage directly, participating in a multi-lender or syndicated specific mortgage, or by investing in a mortgage pool.

The purpose of a mortgage pool is to create a long-term investment vehicle that provides for the fund’s management and a favorable rate of return to investors, while providing them with a diversification of risk and stability. Also, mortgage pools are redeemable on relatively short notice so they offer more liquidity than a direct mortgage or syndication.

For investors who don’t have the real estate expertise and don’t want to commit the time and energy to learn, the best route is to find a company that offers mortgage pools, like The Grace Fund LLC. These companies employ the services of a manager and administrator of the mortgage pool on the investor’s behalf who furnishes the investor with a monthly statement to keep them informed of their account balance, current yield and other details. The mortgage fund manager is paid a modest fee to research the proposal, make the lending decisions and handle all of the payments and administration. Fees earned by the manager are not paid by the investor, but rather a percentage of the income earned on the mortgages and servicing fees charged to the borrower.

These mortgage pools work through a four-step process: 1) investors purchase shares of a company; 2) the company purchases a number of qualified trust deed investments or mortgages; 3) the trust deeds and mortgages provide a return to the company and; 4) the company distributes a return to the investors from monthly cash flow, or growth through a Distribution Reinvestment Plan instead of taking a monthly payment.

Investing in the mortgage market can be a solid option for investors who want to benefit from the commercial real estate market without actually buying real property. In the past couple of years, returns of 10% to 12% or more in mortgage pools – compared to 3-4% for more mainstream investments – have been common. The pool is continuously managed with a primary objective of securing new mortgages to replace mortgages that mature, thus insuring investors a steady stream of passive income.

Monthly income from most mortgage pools usually varies as interest rates change or when mortgages are paid off. The returns to investors from the mortgage pool would follow market interest rate increases or decreases. The investor in a mortgage pool earns a blended rate of return on investment based on the interest earned from each respective mortgage. However, in the case of an investment in The Grace Fund, monthly distributions of 1.25% (15% annualized) are made to investors. To achieve the higher return, the Grace Fund mortgages are fixed at 15.5% annual interest to the borrower, an affiliate of Grace Realty Group. The higher rate reflects a premium to distinguish The Grace Fund from the many competitors vying for investor dollars in the marketplace.

I believe the most convenient, effortless and safest method for the average investor to invest in a debt instrument is through a mortgage pool. They pool their money by buying shares in the fund, and the interest earned from the mortgage payments received from the borrowers becomes income for the fund. All income earned is distributed to shareholders according to their proportional interest. Simple.

Similar to a mutual fund, a mortgage pool provides a vehicle to diversify a portfolio of investments – in this case, mortgages instead of stocks or bonds. Investing $50,000 in a mortgage pool consisting of 25 loans valued at $15 million provides better security through diversification than a $50,000 investment in a single loan secured by a single property.
Unlike a mutual fund, mortgage funds are secured by real estate and not subject to the same volatility as the stock market. Most mortgage pools are backed by well-underwritten and well-secured real estate loans. This is particularly true when the mortgages are secured by property that is financed at a very low loan-to-value ratio. To further mitigate risk, additional security is realized when the borrower purchases properties at a price far below their replacement cost with considerable value-added possibilities (buy low, fix up and sell strategy).

Another advantage to mortgage pools is that they are very suitable for most tax-deferred savings accounts including IRAs and 401ks, making them a good fit for future retirees or anybody else on a fixed income. An investment in a mortgage pool should be considered for inclusion in every serious investor’s portfolio.