Directly making a loan vs. investing through funds have both there pros and cons. Here are some of the issues that investors should consider and then make sure that the returns match their needs. Direct lending requires a greater involvement especially when there is a problem in getting paid. Investing through a fund will mitigate this involvement. However, even if investing though funds investors should from time to time speak with the fund manager and ask question regarding the fund investment.
Liquidity is also important. Investing through funds investors will have easier access to their capital, even if contractually they have to let their capital in the fund for a minimum period of time. Direct lending will not allow investors to get access to their capital unless the note is being paid off. Another way to get access to the capital when lending directly would be by selling the note to another investor. However it may require some capital losses.
Spreading the risks vs. concentrating the capital on few investments is also something to be evaluated. Investing through a fund investors will be able to spread the risk through multiple properties / loans. Thus if any one properties default then it will not affect significantly the fund returns. However, direct lending will be affected if there is a default situation. Returns will be suspended until either the property is sold and the note with arrears paid off, or the property is refinanced or the borrower is catching up with late payments.
We will continue to explore pros and cons of each option in other posts. Now let take a brief look at returns in general a fund can be anticipated to generate for the investors between 7% and 9.5% annual yield. Direct lending can generate anywhere from 10% to 12% annual yield. The spread is due to the type of investments that both a fund and a loan will target.
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