FREQUENTLY ASKED QUESTIONS ABOUT PRIVATE MORTGAGE INVESTMENTS

What exactly are private mortgages? Why would I choose to invest in them?

A private mortgage is a secured debt obligation, which produces a regular, predictable income stream to the investor with all the security, protections and recourse that a mortgage lien can provide. While mortgages do not typically provide any capital appreciation, they do generate a steady stream of interest payments, which, in today’s market, can exceed current money market rates by more than 10%. Unlike stocks, the security is tangible bricks and mortar, where legal protections such as title insurance and many other unique rights and remedies ensure the enforceability of a mortgage lien. Many private mortgage loans are also secured by personal guarantees from the Borrowers, adding another layer of recourse beneficial to the investor.

What kind of returns do private mortgages produce? Is the interest rate fixed?

The typical interest rate for a direct private mortgage ranges from 10% - 16% depending upon the time frame, the purpose, the loan-to-value ratio, the exit strategy, the quality of the Borrower’s personal guarantee(s) and other factors.

The interest rate can be either fixed or floating, depending upon the way the transaction has been structured. Typically the floating rate mortgages always set the initial interest rate as the “floor” so that it can go up if, for example, the Prime rate rises, but cannot go down if the
Prime rate drops.

Do private mortgage investments belong in my portfolio?

Not many investments can dependably generate such strong returns, and few other investments have an asset like real estate as a “backstop” providing a very well protected downside. The key, as in any investment strategy, is to find a good Fund Manager. Consistent success over an extended period of time is, of course, no guarantee of future performance, but it certainly would give some indication of what you can expect. Whether private mortgage investments are right for you will depend upon your time frame, your risk/reward expectations and your anticipated need for liquidity. Furthermore, private mortgages have stable returns and fit well within a portfolio of stocks, bonds and real estate. Adding these to a portfolio will make the returns of the total portfolio more consistent. When evaluating any potential investment, the advice of a professional investment advisor is helpful in assessing the role of private mortgages in an otherwise liquid investment portfolio.

Why would a Borrower seek a comparatively expensive private mortgage rather than a conventional bank mortgage?

The answer is frequently time-based. There are many reasons, but for starters, here are two:

1. Time Crunch: The Borrower has applied for a conventional bank mortgage, but the time-of-the-essence closing date is rapidly approaching, the bank is still completing it’s due diligence, yet the Buyer/Borrower simply has to close in a timely fashion in order to avoid losing a hefty contract deposit. After closing the bridge loan with a Private Lender, the Borrower can then take as long as necessary to arrange permanent financing.

2. Transitional Property: Another typical case would involve a Borrower purchasing a vacant property that he plans to convert to another use (office to residential, for example). A bank would rather finance the deal AFTER the Borrower has executed his business plan, rented the property and created cash flow. The Private Lender is willing to get more deeply involved than most banks, evaluating the Borrower’s past track record, the viability of the Borrower’s current business plan to convert/improve the property, as well as the value of the Borrower’s personal guarantee or other collateral. The savvy Borrower is also fully aware that he is only going to have the Private Loan outstanding for perhaps 12 months, and that paying 12% - 14% for such a brief period of time is far LESS expensive than bringing in much more expensive equity partners for the long haul. If an owner or developer raises additional equity by bringing in partners, it is certain that he will have to give up a substantial “piece of the pie”.

Can I invest with my IRA?

Yes. There are many IRA custodians across the US that handle self-directed IRA’s and are familiar with this type of investment. You can utilize all forms of retirement plans including Keogh’s, Profit Sharing Plans, etc. We accept IRA and other tax-protected investments through third-party custodians such as Charles Schwab & Company, Trust Administration Services Corporation, First Trust Corporation and Delaware Charter Guaranty & Trust Company. More information is available in the INVESTORS/RESOURCES section of www.w-financial.com.

Tax-deferred investors (IRA’s, Pension Plans, Keogh’s and the like) should speak with their financial advisor about any possible impact of UBTI (Unrelated Business Taxable Income).

How often will I receive interest payments?

W Financial makes quarterly distributions of interest to its investors.