What are the tastiest real estate investment recipes?

You can buy and hold. Watch as your property grows in value. And then sell.

You can fix and flip, making money off rising prices.

Buying and accumulating rentals may earn you a nice cash-flow.

Investing in REITS, or real estate investment trusts, allows you to invest in property the way you’d invest in stocks.

And you can certainly earn compensation for selling real estate as a licensee.

But real estate investments have gotten a whole lot more complicated since COVID-19 hit, along with eviction and foreclosure moratoriums.

Here’s another option: Investing in hard-money loans or private mortgages, becoming a note holder in a “deed of trust,” the California term for a mortgage.

New, challenging and sometimes unreasonable COVID-19 underwriting requirements are knocking out a lot of borrowers from getting their purchases and refinances funded through institutional underwriting sources (Fannie, Freddie, banks and the like). Forget the lowest rates in mortgage history this week. They can’t get any rates.

The Wall Street Journal recently reported federal regulators are urging banks to tighten standards for mortgages based on borrowers’ assets, or so-called asset depletion loans. Industry parlance calls these non-QM or non-qualified mortgages.

And mortgage delinquencies are rising. July figures from Black Knight indicate a 450% jump in mortgage borrowers at least 90 days late. We’re talking to 2.25 million people in deep trouble.

Given the property appreciation explosion, many high-equity homeowners flashing red would gladly pay a higher mortgage rate or slap on a second mortgage to buy themselves some time to solve their cash crunch problems. For many troubled homeowners, a hard-money loan might be a better alternative to selling or losing their properties to foreclosure.

You can lend your own money directly if you can find the right property owners in need. Consult with a private party mortgage lending attorney before you engage.

Or you can contact private party or hard money mortgage lenders. Usually, they will source the opportunities for you to invest. They typically earn compensation for executing the transaction (points charged to the mortgage borrower) and they typically charge a monthly mortgage servicing fee.

The three ways to invest in private mortgages are whole mortgages, fractional mortgages and mortgage funds, according to Jim Perry, president of Aliso Viejo-based Alliance Portfolio.

A whole loan could be one investor putting up $500,000 as a first against a property worth $1 million. Fractional ownership could involve five separate investors each investing $100,000. Or you could invest any amount in a mortgage fund.

You must be an accredited investor to participate in a mortgage fund, according to Don Nikols, co-manager of Newport Beach-based Nikols Mortgage Fund LLC. Accreditation requires a net worth of $1 million or more excluding your residence or having an annual income of at least $200,000 if you’re single or $300,000 if you’re married.

Perry said mortgage funds might earn you a 7-8% return on your investment. A whole or fractional mortgage can earn you 7-9%, and second liens can earn you 10-12%.

The average private loan is paid off in 23 to 28 months.

At Alliance Portfolio, loan-to-value lending goes to a max of 65%. In other words, the borrower would have at least 35% equity after the new lien is put against the property.

If the borrower is being charged 7.99%, the investor would receive 7% and Porfolio Alliance would get the rest as a servicing fee.

Nikols fund invests primarily in construction, bridge or swing loans, and rehab financing. The average investor return from 2014 through 2019 was 6.6%.

Investors in whole loans or fractional loans also have to take on the legal costs of chasing down a defaulting borrower. A fund handles those issues on behalf of its investors, Nikols said.

Do your homework. Check references before you invest. Check your lender’s licensing information with the California Department of Real Estate. The DRE has an excellent online publication named: “Trust Deed Investments: What you Should Know!!”

What are common complaints to the DRE?

“Complaints range from investors not receiving expected returns on investments to borrowers not receiving the loan they wanted,” said Shelly Wilson, assistant DRE commissioner.

Private money mortgages may pay better returns, but Perry warns, “Don’t be greedy.”

Consider before you jump how you will get your money back from a borrower without having to go through a foreclosure.