1.- Diversification




One of the benefits of investing in private lending funds is diversification. The investments in a private fund are diversified across multiple assets, and spread across a broad geographic area, which can lower risk compared with just investing in a single asset. The effects of a poorly performing asset are muted by the other better performing ones, and If the market for a specific asset-type tanks, the other asset classes may hold up better.




While property values across the board may fall to some degree during market downturns, fund managers protect their assets by investing through a diverse portfolio of properties on both, Residential and Commercial, and depending on manager’s level of expertise, the fund may invest in a diverse asset-type such multifamily, office, self-storage, retail, new construction, etc. 




2.- Deal Flow




The difference between lending on a case-by-case basis (lending as a Hard Money Lender) vs Investing in a Fund (Mortgage Pool) is simple. It is “Deal Flow”




Finding and Evaluating loans takes time, and it requires a great source of networking to bring deals to the table constantly. Private Funds offer both; the current flow to get multiples deals at once, and the capabilities to underwrite them.




Also, some loans may require large amounts of capital investment for the individual investor.  An example would be a large mixed-use ground-up development project.  These investments typically require large equity contributions, but by participating in a fund, the accredited investor with $100-150K can also join those investments. 




Another scenario where a fund structure makes sense is by making multiple investments at once, where risk is spread out over multiple asst-types and diverse locations.  These types of investments are best accessed through private funds. 




3.- Loan Management 




Besides laws and regulations, keeping records of payments may be time consuming. In the event of borrower default, the fund manager handles the entire workout process at each stage of the process; from default/foreclosure to the marketing and sale of the asset.  Fund managers will hire an attorney to handle all legal matters, and depending on the conditions of the asset, a general contractor might be retained. Property management, maintenance, insurance and marketing will be taking care of by the fund manager until the disposition of the asset has been satisfactory completed.




4.- Technology




The use of technology (Fintech) has made the Private Lending Industry more efficient for both; the borrowers, and the Fund’s Investors. It allows them to have access to the information they need 24/7, and into a paperless lifestyle environment. It creates a smooth, and efficient customer’s experience. 




5.- Yield vs. Interest Rate




Another difference by Investing in a Fund is Yield. When working with a Fund Manager, Investors’ Capital is working 365 days a year. There’s no down time between a payoff and a new loan. Money is always working while comparing one-on-one loan deal. One of the most frustrating things that investors tell me about is when their borrowers send them back the proceeds of a loan that paid off, and then the Investors have to look for new deals over and over again.




Timing plays a crucial role when analyzing Investor’s yield, because it gets fractionalized over the period of a year when not deployed all of the time, it’s actually quite modest, compared to a Mortgage Pool, where Investors’ money is working 365 days a year.




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