Mortgage REIT Investment Funds Can Add Diversity To An Individual Portfolio
As a prospective investor, investing in private specialty-use mortgage real estate investment trust (REIT) fund requires a comprehensive understanding of its intricacies. As the structure of such products differs from public equity investments, knowledge of the landscape requires such determination. This article is designed to provide the basics of what a private mortgage REIT (mREIT) entails, as these types of funds have been of the best performing assets classes in the cannabis sector for several quarters.
A private specialty-use mortgage REIT fund is a pooled investment vehicle that focuses on real estate assets—specifically mortgages with a specialized use case. These funds typically operate outside the realm of public markets, providing investors with exposure to a niche segment of the real estate market.
Specialty-use mortgage REITs distinguish themselves by concentrating on specific types of real estate assets or sectors. This may include niche markets, such as healthcare facilities, data centers, or other specialized properties. Understanding the fund’s specific investment focus is crucial for aligning your investment goals with its strategy.
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General Benefits of Specialty Income Investment Funds
Higher Yields: Specialty-use private mortgage REITs often provide higher yields compared to many publicly traded equities
Real Estate Exposure: Portfolio diversifications their portfolios by gaining exposure to the real estate market (both public and private)
Private mortgage REITs may exhibit lower correlation with broader equity markets
Specialized Investments: Provide investors with exposure to unique opportunities that may not be readily available in the public market
Stable Income: Mortgage REITs often generate income from interest payments on mortgages, which can contribute to a stable income stream (both public and private)
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In the cannabis industry, Pelorus Capital Group is among the most widely-knows mREIT funds. The company employs a mortgage REIT lending strategy in which senior secured notes are collateralized by cannabis-use real estate properties with personal and corporate guarantees from the sponsors. The Fund earns income from the interest paid on those assets, which form the predominant basis of Fund returns.
Unlike an standard real estate trusts, The Pelorus Fund does not directly invest in the properties of the companies it serves. So while standard REITs (both public and private) are subject to the risk of rising and falling property values, the Fund’s returns have remained constant by focusing on returns from mortgage interest, which tends to be stable (provided rigorous underwriting standards are intact to prevent delinquent payors).
Income Generation
One of the primary attractions of mortgage REITs is their potential to generate a consistent income stream. These funds earn income through interest payments on the mortgages they hold. Investors can benefit from regular and predictable cash flow, making them appealing for income-oriented investment strategies.
For example, The Pelorus Fund has produced stable returns throughout inception. This included an internal rate of return that has not yielded less than 11.92% since inception. All the while, the Fund has the added benefit in that it qualifies for a 20% Federal tax savings on income distributed to Fund members.
Private investments, including specialty-use mortgage REITs, can be more illiquid than public equity investment. Investors should be prepared for a longer investment horizon due to limited opportunities for liquidity events—although redemptions can frequently be made any time and without issue.
Investing in specialty-use assets within the real estate market can provide diversification benefits to any portfolio. Understanding a Fund’s approach to risk management, including how it identifies and mitigates risks, is essential for assessing its resilience in varying market conditions.
Risk Considerations
While private specialty-use mortgage REITs offer unique advantages, they also come with inherent risks. These may include market volatility, potential illiquidity, and sensitivity to economic downturns. Understanding and carefully considering these risks in the context of your investment objectives is essential.
Investing in a private specialty-use mortgage REIT fund necessitates a thorough understanding of its investment focus, income generation mechanisms, managerial expertise, and associated risks. Conducting due diligence, seeking transparency from fund managers, and aligning the investment strategy with your financial goals will contribute to making well-informed investment decisions.
As with all investment, investors should carefully assess their financial goals, risk tolerance, and the specific characteristics of the private mortgage REIT before making investment decisions. Additionally, due diligence on the fund manager and a thorough understanding of the underlying assets are crucial aspects of the investment process.
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