Tired of third party lenders, I want to create a mortgage fund

[Ben Bakhshi]

We utilize a few hard money lenders for acquisition (8-14%,1-3 pts), plus we have some private investors who finance most of our equity position (10%,0pt). We've subsequently closed portfolio loans with B2R, Firstkey, and Colony(6-7%,1pt).

So far, its been a pretty good experience, but our velocity of capital is not living up to our ambitions. Loan transaction fees are high, underwriting takes a long time, seasoning requirements are not favorable to us (though B2R does offer 3 month ownership seasoning).

My dream is to have the freedom to buy whatever property I find. 

One way that I would structure a mortgage fund, which can allow us to buy any property (that means preset underwriting guidelines (say 70% max ltv, 1.25 DSCR min), increase loan amounts when a property appreciates based on new appraisals, and pay fair market rates for the debt) is to create an LLC lending entity, which will have a 1st mortgage position open mortgage (line of credit) on all of the management LLC's assets. An audited appraised value position will be provided to investors/lenders on a monthly basis or when changed.

I would likely have 2 tranches. Some investors want to earn ~10%, and are willing to do so short term, while other investors want long term stability and would be happy with 5%.

One tactic is to have the fund lend at 10% rates on un-stabilized properties, no prepayment penalty, where all of this income goes to the 10% tranche. Once a property is stabilized, we increase the loan amount and reduce the interest rate, and the income flows into the 5% tranche.

Once our fund is structured, we can have a small investor relation department raising funds full time. If the fund gets big enough, we can potentially liquidate via MBS or other debt sale that favors the investors.

Thoughts? Suggestions? This definitely is not going to be simple to plan, though it must be simple to execute in practice, especially for the investors. I just don't see another highly scalable way to expand my real estate acquisition ability as the years go by.