Commercial vs Residential Mortgage Investments

Mortgage funds are one of the most attractive investments for high-net-worth individuals looking to balance their portfolios with monthly income. Mortgage investing is considered to be one of the safer additions to any portfolio, given that your investment is secured by a tangible asset. 

Mortgage funds take this one step further, with the already low risk shared between several investors. The two types of mortgage funds, pooled and contributory, offer their own advantages and disadvantages depending on your risk tolerance and experience with investing in different areas of real estate.

A pooled mortgage fund involves investing in a group of mortgages, as selected by the fund manager. This is ideal for investors who are less experienced with property investing. Many high-net-worth individuals choose to invest through a contributory fund, having more control over exactly where their investments are going. This provides more flexibility, especially when it comes to investing in residential or commercial real estate.

Residential Mortgage Investment

Investing in residential real estate debt through a mortgage fund is one of the best ways to improve your portfolio, especially if you are averse to risk. Not only is your investment secured by the property, but it also exists within a market with one of the highest demands globally. 

In the event of a default on repayments, with the property needing to be repossessed, there are plenty of potential buyers due to the constant demand for residential real estate. When there is a large pool of people looking to buy a house, selling the property is generally not a concern. This results in residential mortgage being seen as an investment with significantly less risk.

Commercial Mortgage Investment

Commercial mortgage tends to be much more specialised than residential, with fewer buyers interested in properties on the market. An important factor when considering commercial real estate debt investment is what industries a property is suited for and the demand that comes with it. 

Because commercial property may be harder to sell when repossessed, there is an inherent level of risk involved. However, this higher degree of risk also means that commercial debt tends to be much more lucrative. With commercial real estate debt funds still resulting in a monthly income, it can be an excellent addition to the portfolio of a more risk-tolerant investor.

The commercial real estate debt market is often changing as banks adjust their attitude toward certain asset classes. This allows mortgage lenders to fill gaps in the market, taking on opportunities that can offer higher returns. 

Mortgage Investments in the Current Market

Despite recent turbulence in the residential and commercial markets, real estate debt funds are still a reliable long-term investment for high-net-worth individuals seeking a way to strengthen their portfolios. 

There are a number of factors impacting the residential property market, including rising interest rates, which can put downward pressure on borrowers to sell. However, property still remains one of the more stable investments available, especially considering that it has historically continued to increase in value over time.

Similarly, commercial real estate has also been impacted by changes in the market, particularly as businesses adjust to many employees working from home. This has resulted in some businesses reducing their office space, as they no longer need larger buildings. Despite this, it is expected that as the market changes and unemployment rises, businesses will likely see more employees returning to traditional office settings. 

Ultimately, the risk involved in commercial mortgage tends to remain the same, particularly if it is invested in through a contributory mortgage fund. Most of the time, businesses will continue to pay back the mortgage or sell. Although the cost of funds may increase in the short term, rates will rise with it, balancing the impact on investors.

Investing in Commercial and Residential Mortgages

One of the core aspects of a strong portfolio is diversification, which is why most high-net-worth individuals will choose to invest in both residential and commercial mortgages. Residential mortgages offer the stability that helps provide a solid foundation for your investment strategy, while commercial mortgages offer greater returns at a higher degree of risk.

To learn more about commercial and residential mortgage investments or to speak with a specialist, you can contact Arthurmac on 1300 417 690 or alternatively complete our enquiry form.