From the May 2008 issue of Investment Advisor • Subscribe!

Risk Is Remote When Managed Properly

Another way that Larry Nakamura and his clients benefit from the real estate market is through a second company, Torrey Capital Mortgage Fund, essentially a private mortgage pool, which he founded last June because so many of his clients were already investing in first trust deeds. "We essentially invest in short-term notes secured by real estate," he explains. "They yield a higher rate because there's a little more risk than in a conventional type of loan, but for the most part, if they are underwritten correctly, they have a great return and your actual risk is that you end up owning a property. Those investments you have to look at from the standpoint of, 'Would I want to own that piece of property, or would I want to own that project for my own portfolio?' If the answer is yes, then it's probably a good investment. So we'll earn 10% to 12% interest for 12 months and if the borrower does not perform, then we end up with the property. So the likelihood of us losing assets or losing principal is pretty remote, if it's done properly, and you're not leveraged."

To participate in the mortgage fund, a client invests a minimum of $100,000 into a private limited partnership, which then purchases first trust deeds or participates in short-term loans on commercial properties or small residential developments. "Then we get a monthly interest payment on those loans that come back to the pool and those interest payments, after expenses for the fund, are distributed out to the shareholders, to the partners," explains Nakamura. "Instead of an investor going out and buying one or two first trust deeds, we've created a pool that can go out and buy 10 of those and diversify. The idea is to help clients diversify, to spread the risk around, and have it professionally managed."

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