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Mortgage debt investments: an opportunity for attractive risk-adjusted returns

Debt portfolio sale and purchase transactions require a high level of specialization that allows analysis of acquisitions but also subsequent management. Imperial Fund provides an assessment of this real estate investment opportunity.

In the investment market, there are certain profiles that prefer to acquire real estate assets indirectly, that is, through the purchase of debt. The main reason for opting for these processes is that the owners of the debt portfolios usually add to the reduction of the price of the real estate asset a discount for transferring their creditor position - given the risk that this entails - and also that some of the best real estate collaterals are still insurance for credit.

The attractiveness of this type of asset has been very present in the U.S. real estate sector for the last decade, especially after 2009 when real estate debt became the main protagonist of operations, breaking a record in investment volume. The trend was maintained in the following years, although with lower amounts as would be expected, since as the recovery of an economy strengthens, the appetite to buy other types of real estate assets increases and diversifies.

However, experts like Imperial Fund, which seek to achieve attractive risk-adjusted returns by exploiting inefficiencies in the residential and commercial real estate lending market, still see huge potential in the U.S. real estate debt market amid the Covid-19 pandemic, and most of the large funds place it among their objectives for the last quarter of 2020.

Yet being successful in these operations is not easy. Debt portfolio sale and purchase transactions require a high level of specialization that allows analysis of acquisitions but also subsequent management. In this way, acquiring the debt at an adequate price is not the only requirement for the buyer to achieve high profitability. Here it is essential to have maximum efficiency both in the management of collaterals -through its exhaustive study and assessment- as well as the correct analysis of the solvency and disposition of the debtor.

A traditional mistake that financial institutions make when managing these portfolios from their balance sheet is to manage it from the perspective of a loan, without considering what the collateral is worth and what possibilities for value optimization exist.

In recent years, investment in debt with real estate collateral by distressed funds has been very outstanding and at Imperial Fund we expect a continuation of these operations. This type of institutional investor transactions will be joined by small-size packages aimed at medium-sized investors who are looking for specific collaterals (real estate) and who today are the guarantee of a loan.

What are the benefits of investing in mortgage debt?

-You can obtain assets of all types, whether buildings, floors, townhouses, finalist land, hotels. So, it is a very attractive value offer for investors in real estate assets.

-The risk involved in the operation is practically zero, as long as the operation is analyzed by a real expert in the matter.

-Debt assets can be obtained at a very good price for the investor, so the profitability of this type of product is very high.

How can I access this debt market?

These type of products present a series of complexities that must be analyzed to avoid any type of risk in the financial operation, so it is recommended that the entity you hire, analyzes and has knowledge in the following fields:

-Credit
-Loan level analysis
-Acquisition and management of mortgage loans
-Mortgage origination platforms

Imperial Fund is a South Florida based mortgage investment fund that acquires and manages investment portfolios of mortgage loans, real estate debt securities and loans. Imperial Fund brings more than 100 years of combined mortgage and investments experience including trading, capital markets, structured finance, assets, liabilities and risk management. With a demonstrated ability to evaluate and select assets that are optimal at given points in the cycle, Imperial Fund has a successful track record of stable yield for investors and a strong management commitment of $30 million of working capital with long term commitments of $10 million.

Imperial Fund seeks to achieve attractive risk-adjusted returns by exploiting inefficiencies in the residential and commercial real estate lending market.

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