Mortgage Note Investing

Investing in a Mortgage Note fund is very different than investing directly in real estate. Returns from mortgage notes do not depend on the value of the underlying property, but rather the ability of the note-holder to continue making scheduled payments. Of course, the underlying property serves as collateral for the note, so it is important to ensure there is adequate safety margin so that the collateral is still effective even in the middle of a real estate downturn.

Veripax uses privately-offered funds from Amerifunds Diversified Funding to gain access to the mortgage note market. Amerifunds purchases notes from private note holders, typically with a substantial safety margin and always at a discount from fair market value. The yield of a fund is determined by the average interest rate of the individual mortgage notes, combined with the purchase discount of the notes. It’s not complex, and the yields tend to be boring, but that’s what we like.

Commercial Real Estate

Real estate can be a great hedge against inflation, and there are many ways to participate in this asset class. The real estate market can be inefficient, meaning that with expertise and a significant amount of research and work, under-valued properties can be found. Veripax uses investment companies that target these inefficiencies by carefully managing risk and focusing on short- to medium-term projects with attractive investor ROI. It is also very important that the companies we work with be investor-friendly, meaning that the managers of the investment or fund invest along side shareholders, and derive a significant portion of their overall return through the growth of the investment (not just fees).

Commercial Bridge Loans

No, commercial bridge loans do not invest in bridges. A bridge loan is a short-term (typically 12 months) loan secured by real estate. They are used as a financial “bridge” that allows a company to supplement or boost their cash position. There are a number of reasons why a company would need to do this, but there are a few common characteristics: bridge loans are short in duration, they involve a higher interest rate than conventional financing, and they provide funds quickly. In exchange for quick access to funds without waiting for extended credit checks and 5 years of tax statements, borrowers must agree to a fairly high interest rate and they must secure the loan with a significant amount of equity as collateral. If the real estate securing the loan is appraised at a high enough value relative to the loan amount, the lender can quickly move forward with the loan. Bridge loans that VFM has access to are rarely higher than 50% Loan-To-Value.

It is important to understand that the relatively high rate of return available with commercial bridge loans does not reflect the same amount of risk to the lender or investor as an unsecured bond that most investors are familiar with. With unsecured lending, the interest rate directly reflects the credit quality of the borrower. In the case of hard asset-backed lending, the higher interest rate reflects the fact that the borrower needs the money quickly. With an unsecured loan the primary risk lies in the creditworthiness of the borrower. With hard money lending, the risk lies in the accuracy of the assessed value of the property relative to the loan amount, which is much more within the control of the lender.