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Investing in real estate has always been an attractive option for individuals looking to diversify their investment portfolio and potentially earn higher returns. While traditional real estate investments usually involve purchasing properties directly, there is another avenue for investing in the real estate market - private mortgage funds. Private mortgage funds offer investors the opportunity to invest in real estate by lending money to real estate borrowers.

What Are Private Mortgage Funds?

Private mortgage funds are pools of private investors’ capital used to fund real estate loans. These funds are typically managed by a company – often a loan originator. Private mortgage funds can offer loans to borrowers who may not qualify for traditional bank financing, need a faster closing and/or more flexible underwriting guidelines. Investors in these funds can earn attractive yields which essentially come from interest payments received from the borrowers of the various loans in the portfolio.  This is similar to how a bank earns money from mortgage lending.

Private mortgage funds generally operate independently and are not tied to traditional financial institutions. They provide an alternative form of financing for real estate borrowers. 

In this blog, we will discuss private money lending, factors to consider before investing in a private mortgage fund and advantages/risks of investing in private mortgage funds.  We will also provide insight into optimizing your investment strategy for maximum returns.

Understanding Private Money Lending

Private money lending refers to the practice of individuals or private lending companies providing real estate loans to borrowers, usually under streamlined underwriting criteria. Unlike traditional lending institutions such as banks, private lenders typically involve less stringent underwriting criteria, faster approvals quicker closings. 

Although the underwriting is often different than banks, it can nonetheless be very effective.  For example, particularly for relatively small loans, good private loan underwriting can focus on keeping the LTV (loan-to-value) relatively low and understanding and managing towards the exit strategy.  This contrasts with typical bank underwriting that might be more focused on the "credit" of the borrower and offer a higher LTV and take much more time.

Private money lenders can offer more flexibility in terms of loan amounts, repayment terms, and collateral requirements. Working with private lending companies such as Red Tower Capital can provide opportunities for borrowers who need quick access to funds or have unique financial circumstances, that may not meet traditional lending standards.


Key Differences Between Private Money Loans and Traditional Mortgages

Private money loans differ from traditional mortgages in several keyways. Firstly, traditional mortgage loans are provided by financial institutions such as banks or credit unions, while private money loans are loans provided by private lenders who operate independently. The lending criteria for private money loans are often more flexible compared to traditional mortgages, allowing borrowers with unique circumstances or lower credit scores to access financing. It also allows borrowers who are under time constraints and need to close quickly or are looking for financing to repair or stabilize an investment property.

Secondly, private money loans typically offer higher interest rates compared to conventional loans. This is because private lenders take on higher risks by lending to borrowers who may not qualify for traditional loans. The higher interest rates compensate private lenders for the increased risk.

Factors to consider before investing in Private Mortgage Funds

Before investing in private mortgage funds, it is important to undertake thorough preparation to ensure you are financially ready and make well-informed investment decisions. This preparation involves conducting due diligence and evaluating your financial readiness. Below are some suggestions you may consider.


1) Advantages of Investing in Private Mortgage Funds

Private mortgage funds offer the potential for higher returns compared to traditional investments. Investing in these funds allows for diversification of your investment portfolio, spreading risk across different asset classes. 

  • Diversification of Investment Portfolio: Investing in a mortgage fund that has a variety of loans to different borrowers on different collateral provides an easy way to diversify in this class, which is a great win.  However, investors should consider investing in two or more mortgage funds if they want greater diversity in this area and continue to invest in other asset types such as stocks, bonds, and real estate to maintain greater diversity.
  • Income: Earn stable, passive income that is distributed regularly or can be reinvested. Expect higher relative returns relative to CDs, money markets, savings accounts, etc.
  • Security: Investment funds are secured primarily by first position liens at conservative loan-to-values providing asset-backed protection.
  • Simplicity and Convenience: Participate passively in real estate, without the burden of property management or maintenance.

2) Understand the Risks Associated with Private Mortgage Funds

Liquidity Concerns and Redemption Restrictions
Investing in private mortgage funds may pose challenges related to liquidity and redemption limitations. Unlike traditional investments, private mortgage funds may have restrictions on redeeming your investment or accessing funds quickly. This lack of immediate liquidity can impact your ability to react swiftly to financial needs. Additionally, redemption restrictions may limit when and how you can withdraw your investment, tying up your capital for extended periods. 

Interest Rate and Credit Risks
Private mortgage funds often involve higher interest rates compared to traditional loans, reflecting the increased risk involved. Additionally, credit risks come into play as the borrower’s credit score and history impact the likelihood of timely repayments. Being aware of these risks allows investors to conduct thorough due diligence before committing their funds, ensuring a balanced approach to managing their investment portfolio. 

3) How Much Capital Is Needed to Start Investing in Private Mortgage Funds?

To start investing in private mortgage funds, the capital required can vary depending on the fund, loan term, and investment strategy. Most funds may have a minimum investment requirement. For example, Red Tower Capital’s mortgage fund RTC VI has a minimum investment of $50,000.

4) Can I Invest in Private Mortgage Funds Through a Retirement Account?

Yes!  So long as the funds support it.  Many do, some do not.  In general, an investor will need retirement funds held in an account at a self-directed IRA custodian. Once the investor's funds are there, they can invest in mortgage funds such as RTC VI.

5)  Research Potential Mortgage Funds and their Managers

Researching potential mortgage funds is important before investing. Start by exploring various private mortgage funds and their managers in the market. Consider factors such as the following. 

  • How long has the manager operated?
  • How long has the fund been around?
  • What types of real estate investments do the manager and fund focus on?
  • What is the manager's and fund's track record in private lending?

As an example, you may consider Red Tower Capital. Red Tower Capital provides financing for residential and commercial properties alike and for various private loan "scenarios". These included bridge loans, owner-occupied bridge loans, fix and flip loans and construction, etc. 

Since 2011, Red Tower Capital has been offering investors the opportunity to invest in mortgage funds with attractive and consistent yields. 

RTC VI is a private mortgage fund managed by Red Tower Capital, Inc. The primary strategy of the fund is to provide current income to qualified investors by securely investing in real estate loans. RTC VI began operations in 2020 but was based on a predecessor fund that was created in 2015 and began with a portion of its investors and loan portfolio.
Red Tower Capital provides financing for several property types such as single-family residences, apartment, office, retail, mixed-use, warehouses, and land. Since 2011, Red Tower Capital has provided quality alternative real estate financing to residential and commercial borrowers.

6)  Evaluate Fund Performance and Risk

Analyzing a potential mortgage fund custodian’s performance involves assessing historical returns, interest rate risk, and consistency. Factors to consider include the following.

  • What is the annual average rate of return?
  • Do they have annual audits on their mortgage funds?
  • How often are investments to investors paid out?
  • Do they have a current third-party diligence report?

Red Tower Capital’s private mortgage fund, RTC VI, has generated 9+% per year for its entire existence from 2020.  Its predecessor fund had 5 years of operations beginning in 2015 with similar or higher returns for each year.  All years of both funds have been audited by third party accounting firms familiar with this business model.

Additionally, RTC VI has a current third-party due diligence report available from FactRight.  Although this report is geared to registered investment advisors (RIAs), other potential investors may find the information contained it in invaluable.

Contact an experienced team member for more information or to get a copy of the full track record, audits, report, and any other desired information.


7) Network with Other Investors:

Engaging with other investors in the realm of private mortgage funds can offer a plethora of benefits. Networking provides avenues for shared insights, market trends, strategies, and potential managers and funds. Collaborating with other investors can provide a supportive environment for growth and learning. 

Contact a team member a Red Tower Capital to get more information about networking events near you. 

8)  Understand the Legal Framework and Lending Strategies

For most investors, the most effective way to manage these items is manager selection.  Managers and funds should be careful to lend in accordance with state and federal laws.  

For example, a common private lending strategy is to focus only on “business" and "investment purpose” loans.  The benefit of this type of lending is that it is less prone to challenge under most state and federal laws and provides for relatively quick underwriting.  

Another strategy is to focus on simple to understand property types, such as houses and duplexes.  Both strategies have their benefits, but because of their ease, sometimes these lending strategies become too crowded when a lot of capital enters the space which ultimately increases risk and/or lowers returns.

Some lenders make a point to lend on these and other strategies, which may have the effect of allowing for more loan possibilities, which can reduce risk and/or help with returns.

Red Tower Capital employs various strategies, including the above, but also lending on "owner occupied bridge loans", small commercial properties and infill lots.  These scenarios or property types are often a little harder to underwrite, but they historically have helped with increasing the number of loan possibilities and helping with returns.

9) Consider a Mortgage REIT

Some mortgage funds are set up as Mortgage REITs or are pending Mortgage REIT conversion.  Under current law, a mortgage REIT has a few benefits.  These include:

  1. 20% Qualified Business Income Deduction regardless of tax bracket for REIT dividends.
  2. Simpler tax filing – no need to file taxes in multiple states and no multi-state withholding.
  3. No Unrelated Business Taxable Income (UBTI) for self-directed IRAs / retirement accounts.
  4. No withholding for Foreign Investors.

Red Tower Capital’s mortgage fund RTC VI is pending Mortgage REIT conversion.  After a bit more investor diversification, it will be converted to a mortgage REIT with all of the benefits.

10) Making Your First Investment & Following up

Once you have made your investment choice, complete the required documentation, and transfer the agreed-upon investment amount. Stay informed about the fund’s performance and any updates provided by the fund managers. Monitor your investment regularly to ensure it aligns with your financial goals and risk tolerance.


You can optimize your investment approach and potentially reap higher returns than traditional avenues by investing in private mortgage funds in addition to other types of investments. Remember, manager selection, staying informed and monitoring your investments are vital components of a successful investment journey in private mortgage funds, as well as other types of investments. 

Contact an experienced team member at Red Tower Capital for more information about enhancing your financial portfolio with the addition of a mortgage fund, such as RTC VI.