Do you want to build a passive income stream outside of the stock market?
Enterprising investors are finding solutions that allow them to earn market-beating returns that are secured against real assets. The same way Aussie homeowners have access to over $35.8 trillion worth of property equity, investors can now gain access to this space without needing billions of dollars like traditional banks do.
But wait…there’s more.
While most investors associate real estate investing with property ownership, there’s a way to access all of these returns without any of the drawbacks. Like dealing with tenants, uncollectible rent, massive capital requirements, missed monthly payments, unexpected repairs, or property vacancies.
What You’ll Learn
- What Are First Mortgage Investments?
- Why First Mortgage Investments Outperform Traditional Alternatives
- How To Pick Smart First Mortgage Investments
- Creating Your Investment Strategy
What Are First Mortgage Investments?
First mortgage investments occur when your money is loaned out to a borrower that’s secured by a registered first mortgage over real estate.
Here’s a simple breakdown…
When somebody needs financing for real property, they will ‘grant’ their property as security for a loan. The investor gets first dibs if things go south.
Remember how Bernie Madoff’s investors thought their money was buying ‘stocks’? Rest assured when you invest in first mortgages, there’s a tangible asset backing your investment.
If a borrower defaults on their loan, the property can be sold to repay the investment. For investors seeking stable returns, first mortgage investments provide a compelling middle ground between low-yield savings accounts and volatile stock markets.
Monthly payments get deposited directly, while the capital is secured by real estate. It’s the best of both worlds!
Why First Mortgage Investments Outperform Traditional Alternatives
Okay, but like…why would you want to?
Simply because everything else sucks.
Interest rates on savings accounts won’t keep up with inflation. The stock market crashes whenever Trump makes a face. And investing in rental properties requires managing the entire property or hiring someone to do it.
First mortgage investments allow market beating income via a monthly payment. All investments are secured against property so there’s no need to worry about money evaporating overnight.
Steady Income
With first mortgage investments, interest income gets earned every single month and deposited straight into the bank account.
No funny business. No waiting around for dividends. Regular cash flow on the investment.
For the most part, Australian first mortgage funds are targeting returns between 6-10% per annum. While returns can vary from year to year, many investors are consistently beating the market averages by a wide margin.
Real Asset Security
Real assets.
The investment is secured by actual property that can be seen and measured.
Independent valuations are performed on every property to give investors peace of mind. If a borrower were to default on their loan, the property would be sold in order to pay back the investment.
As first mortgage investors, the seat is first in the queue. Prime seat right up front baby.
There’s no need to rely on ‘AAA’ rated bank’s words that they’ll pay back some day. With first mortgages, investments are tied to real assets that aren’t susceptible to CEO scandals or Federal Reserve interest rates.
The December quarter 2025 saw loan commitments rise 5.1%, showing the first mortgage industry continues to grow despite stock market fluctuations.
How To Pick Smart First Mortgage Investments
Like any investment opportunity, knowing what to look for is half the battle.
If you want to pick winning investments every time, then follow this handy checklist…
Compare Loan-To-Value Ratios
Loan-To-Value Ratios (LVR) are a major factor in first mortgage investments.
This basically means…
If money is lent against a $1 million dollar piece of property at 70% LVR, then only $700,000 is being loaned out.
Why should you care? Simple. Real estate values can go down.
If there’s a high LVR of say… 90%, then property prices would only need to fall by 10% for capital to be at risk.
For this reason, most investors only look at first mortgages with LVR’s of 70% or less.
Low LVR = Happy investor.
Property Type & Location Matters
Location, location, location.
This real estate mantra also applies to first mortgages.
Investing in an apartment complex in Green Square isn’t the same as lending money for a residential home in Double Bay.
Understanding where the property is located matters. What are the prospects of the suburb? Is it close to major employment areas? Any infrastructure developments?
These are all questions to consider when weighing up first mortgage deals.
Development sites can offer greater returns, but come with more risk. Balance the portfolio with a healthy mix of property types.
Know Your Borrower & Exit Strategy
Every quality first mortgage investment has a solid exit strategy in place.
Is the borrower going to refinance the loan with a bank? Sell the property? Finish developing and sell?
Knowing how the borrower plans to repay at the end of the day helps evaluate risk.
If they can show a willing and able bank to refinance the loan, capital is safe.
Personal guarantees and additional security also provide comfort when lending money.
Look For Proven Fund Managers
Don’t just trust anyone with money.
When investing in a mortgage fund, take the time to research the manager.
Talk to investors that have already committed capital. Ask questions about historical performance. How many loans have they originated? What’s their default rate?
Remember…
Investing through a managed fund means trusting somebody else with money.
Any money manager can make big promises. Look for managers that have a track record of consistent performance throughout both bullish and bearish markets.
Creating Your Investment Strategy
Thinking about dipping your toe in the water? Awesome! Here’s a few tips to help along the journey…
Start Small
Don’t go all in with the portfolio.
The best way to learn about first mortgages is to get stuck in. But that doesn’t mean investing everything and praying for the best.
Start with a small amount that’s comfortable for learning. Most funds have minimum investments from $5k all the way up to $100k+. Choose an entry point that allows education without risking hard-earned capital.
Diversify
Don’t put all eggs in one basket.
If investing through a pooled mortgage fund, then congratulations! The investment is automatically diversified across numerous loans.
Individual loans are a little different. Make sure to spread investment across at least 5-10 different opportunities. Even if one investment defaults, capital will be protected by the other loans.
Choose Investment Terms That Align With Your Goals
First mortgages terms can vary from 12 months all the way up to 24 months.
Make sure the investment term suits needs. If the money will be needed back in 6 months, don’t lock capital into a 24 month investment.
Many funds offer monthly redemption features. Others require leaving money for the full term of the investment.
Understand the liquidity of the investment to avoid getting locked into a bad position.
Monitor Your Investments
Investing in first mortgages doesn’t end once hitting the ‘buy’ button.
Successful investors monitor their investments regularly. They reinvest earned interest. And adjust their portfolios as their financial situations change.
Keeping an eye on market conditions and staying up to date with any changes to lending regulations is essential.
By constantly monitoring investments, better positioning happens to make changes when necessary.
Conclusion
First mortgage investments allow earning monthly income that’s secured by real property.
Forbes Magazine claims that real assets have only made up 2% of Australian investments portfolios. This means most investors are missing out on a substantial source of income.
If quality investments are picked, conservative lending standards maintained, and long-term thinking applied, steady returns get generated that most investors can only dream of.
Here’s the cliff notes version…
- Earn monthly passive income payments that are secured against real estate
- Low LVR’s of 60-70% provide investment with downside protection
- Returns generally range from 6-10% pa
- Secured against real assets which have lower correlation to stock markets
- Diversify across many loans to further reduce risk
Investors are turning to first mortgages as a way to boost overall returns. And for good reason.
First mortgage investments allow accessing property returns without any of the downsides of property ownership.
Zero percent should be allocated to first mortgages… until this is understood.
Also Read