Methods of investment

Private Mortgage Investment takes two primary forms: Fractional Investment and Mortgage Fund Investment.

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===Fractional investment===
This is the traditional method for investors to extend loans to borrowers. A limited number of investors (in California, 10) secure a loan made to a borrower by placing their names on a First (or Second or Third) Deed of Trust on the borrower’s property. Monthly payments are made to a servicing agent, who then distributes the payments pro rata to the individual investors.

Fractionals provide the benefits of simplicity and transparency. Each individual investor reviews each prospective loan prior to making a decision to invest. On the downside, “building” each loan investor-by-investor takes time, detracting from one of Private Money’s key advantages: speed.

By its nature, the investment is not diversified for individual investors. The investment is made entirely to a single borrower, usually on a single property. In the event the borrower fails to make monthly interest payments, the income flow to the investors stops. If the borrower defaults on the loan, this income flow will cease completely. Investment principal and interest will be recaptured only after the loan is renegotiated, or the property securing the loan is foreclosed upon and sold.

Further, investors holding larger percentage interests in a fractionalized loan may maintain greater control within the transaction the other, smaller investors. In the event that additional investment funds are required in order to prepare a foreclosed-upon property for sale, investors must come up with these additional funds.

===Mortgage Fund Investment===
Mortgage Funds (also, “Mortgage Pools”) resemble equity mutual funds, funds comprised of a wide selection of stocks. Investors deposit money in a fund: The fund is managed by mortgage brokers or mortgage bankers certified by the State. Money within the fund is lent to borrowers and is secured by First (or Second or Third) Deeds of Trust naming the FUND as the holder, rather than individual investors.

By purchasing shares in a mortgage fund, and as interest is earned from monthly mortgage payments, the fund generates income.

There are approximately 100 mortgage funds in California. All are closed-end, meaning the number of investors and amount of investment dollars are capped. Many are closed: They are not accepting new investors.

Investor yields are similar to those obtained through fractional investment. The primary difference lies in diversification. Risk is spread across a portfolio of loans, not centered on a single loan as with fractionals. Risk is spread across the entire pool of borrowers, and different types of properties, in different locations.

As a result, in the event of a late pay or default, there could be minimal – or no – impact on investors’ yield. Reserve accounts established by the fund and by its manager would compensate for any shortfall.

Another difference in funds is liquidity. If an investor in a fractional wishes to cash in his position, he must either be replaced with another investor, or he must wait for the loan to be paid off by the borrower. Because many private money loans take the form of short term bridge loans lasting less than a year, this waiting period is generally limited.

Mortgage funds, however, generally offer rapid –sometimes, immediate—repayment of principal. This is possible because a) Funds have reserve accounts in place for this purpose; b) Funds are generally oversubscribed, with more investors wanting into the fund than those wanting out.

The third difference is control. The situation is analogous in the equity world to investors selecting individual stocks in which to invest, vs. investing in a mutual fund. Whereas fractional investors make the investment decision on each property themselves, fund investors delegate this duty to the fund managers.

Other features:
Fund participants enjoy 365 day investments – they aren’t sidelined between loan opportunities
Less paperwork