Fixed income investing goes beyond than yield—investors analyze yield vs. cash-flow, liquidity, risk, exit-strategies and tax efficiency.
Fixed income investments are designed to generate a specific or "fixed" level of interest income. Fixed income investments may include treasury bonds, government and agency bonds, municipal bonds, corporate bonds, private real estate funds, mortgage-backed securities, as well as certificates of deposit and preferred stock or securities.
There are four key-features to fixed income investments that make them desirable to investors. Each feature provides a unique set of benefits that varies depending upon the type of fixed income investment:
Current Income Generation
Favorable tax treatment.
Most private RE mortgage funds provide attractive, consistent, risk-adjusted current returns secured by real estate through the origination making, and purchase, of mortgage loans secured by first-priority liens on underlying real estate.
Investors can leverage fund manager’s investing strategies to create a stronger blend of balanced portfolio that can offer both; passive cash flow and equity upside. Since the manager’s portfolio is focused on diverse investments rather than managing individual investments, they keep away themselves from a single-event types of risks, and by diversifying investing in different funds, the investors can get the benefit of both: a pre-targeted monthly income (for cashflow), and a back-end upside (for growth) that can provide them a higher probability of meeting or exceeding expectations.
Private mortgage funds typically pay investors largely based on the terms of the loans in their portfolios, specifically from the interest rate and some funds might consider some other fees like origination, extension, late payments, etc. The rates paid by the borrowers are determined by some of the following factors:
Term or duration of the loan
Borrower’s net worth
Borrower’s Credit Score
Capital in the deal
Experience level of the borrower
Quality of the tenant(s) if a commercial leasing will be involved
Typically, the rates for private mortgages are fixed for the duration of the loan’s term, allowing the fund’s managers to deliver consistent and conservative risk-adjusted rate of returns to the fund’s investors. (Most of the time loans are interest only).
Investors who participate in a professionally managed private mortgage fund can expect to earn from high single-digit to low double-digit rate of return.
We believe fixed income plays an essential role in an investor’s portfolio. If you are seeking a steady and reliable stream of income while receiving attractive, risk-adjusted returns you may want to consider private lending funds. At Capital Insiders, we offer a wide range of Income Funds tailored to satisfy Investor’s needs.