FAQs: For Mortgage Pool Investors

For mortgage pool investors, portfolio diversification is key to protecting investor capital. Ask the sponsor about their loan origination process and what due diligence is performed on each loan. At Socotra Capital, we focus on the quality of the underlying collateral (the real estate) and the borrower's previous experience. We build loan pools that combine various property asset classes, geographic locations, and borrower profiles, offering attractive, risk-adjusted returns and higher yields when compared to conventional investments.

Investing in private credit offerings, which are direct lending opportunities in the real estate market, allows investors to access higher yields compared to many public market alternatives. These returns often include an illiquidity premium due to the nature of private investments. As a non-bank lender, private credit typically will offer flexible loan products that command competitive interest rates, which translate into attractive returns for the investors. Terms are usually structured so that the loans are either floating rate or fixed for a very short period, such as 12 months or less.

Mortgage-backed securities (MBS) are pooled investment vehicles traded on financial markets, whereas our approach is focused on direct lending. This means investors in our pools are directly investing in the underlying hard money loans originated by Socotra Capital, rather than a securitized product. This allows for greater transparency into the underlying collateral and loan performance. Our robust loan servicing ensures the effective management of these loans within the pool, aiming for consistent and strong returns for our investors.

To invest in hard money loans, start by researching to find a lender that you trust. Look for a company with a strong track record of reliable returns. Once you have narrowed your options, learn about the minimum investment, payment schedule, and lock-up periods to determine the best fit for your portfolio. To invest with Socotra Capital, you must be an accredited investor. Once you confirm that you are an accredited investor, you can access the Investor Center, which provides all the information you need about lock-up periods, returns, and more.

A trust deed is what makes up a mortgage pool. It is an alternative financing method in which a trustee holds the deed for the property until the debt is fully paid to the lender. In a large mortgage pool, there may be hundreds of deeds of trust secured by hundreds of different properties.

Trust deed investing is essentially when an investor fully or partially funds a real estate loan. The deed to the property is held in a trust until the loan is repaid.

Returns vary depending on the terms of the agreement. Access the Socotra Investor Center to learn more about typical returns for trust deed investments. 

A trust deed investment may be secured by a variety of asset classes: industrial, retail, multi family, mixed use, residential, condos, townhomes, and more.

It varies, but investors in trust deed funds should look for an average 50 percent loan-to-value (LTV) ratio on individual loans. A lower LTV ratio helps keep borrowers motivated to keep up with payments. If you’re investing in individual trust deeds, look at every scenario on a case-by-case basis. In general, you can go higher on purchase transactions and lower on cash-out refinancing. Typically, the higher the LTV, the higher the risk, the higher the rate of return.

When a borrower defaults on a hard money loan, the lender or investor has the right to foreclose on the property that secured the loan.

When a property’s value declines, the risk of borrower default increases, partly because there is less equity for the borrower to protect. This is why the LTV ratio is so important. A lower LTV reduces risk and creates more incentive for the borrower.

Interest rates tend to have more impact on investments with longer durations, so it depends on what the terms are for the promissory note that is secured by the deed of trust. Most private lending trust deeds are typically short duration and involve some variable interest rate, so the value impact from interest rate changes is very small.

Borrowers are typically real estate investors or small business owners who need capital to finance a project. Examples include doing a fix-and-flip or making improvements to either a rental property or their business property.

If you’ve ever invested in any kind of real estate or are accredited, trust deeds may be a good way to diversify with a new, uncorrelated asset class and build a resilient portfolio. Look for a trust deed fund that aligns with your risk tolerance and return expectations.

If you’re an accredited investor, you can get more detailed information by accessing the Socotra Investor Center.

Fractionalized trust deeds often come with higher risk, especially if you are not the one in control. This is why many choose to invest in a trust deed fund if they're considering fractionalized notes, as it accelerates diversification quickly.  Fractionalized notes carry all the same risks, plus they introduce an additional element of risk, specifically the lack of control.

Every investment varies, whether you’re investing in individual trust deeds or a fund. For individual loans, it depends on the value of the property. With fund managers, it varies widely, but could be more accessible because you’re contributing to a pool rather than funding a single loan.

Brokers can charge rates above the usury cap. This allows for higher rates than individual trust deeds. A license is required to collect payments from an individual, and brokers have the necessary licensure.

A trust deed fund is also often referred to as a mortgage pool and is comprised of investors who pool their capital to fund multiple loans. This helps reduce individual loan risk in the event of a default. An individual trust deed is a loan to an individual borrower. This would typically present a higher concentration risk in the event the borrower defaults.

Yes. You can use retirement savings for both individual trust deeds and trust deed funds. Individual trust deeds will require a lot more paperwork, whereas a fund allows you to do the paperwork just once.

The investor’s name should appear on the deed of trust, promissory note, title policy, and any other documents that are typically public record.

The originating broker or a licensed third-party provider will service the loan. If outsourced, be mindful of how much work you’ll be asked to do. Third-party servicing can place a lot of responsibility on you, the lender, when problems arise. An originator that also acts as a servicing provider will ease the burden.