Building a Legacy Wealth Portfolio: Real Estate Debt Funds

This week I will discuss the third leg of my legacy wealth portfolio – real estate debt investing.  A real estate debt fund is a common resort for experienced real estate developers and investors. It gives them access to short-term capital for real estate projects.  As a commercial real estate investor, I invest in commercial real estate debt funds such as Cadre, CrowdStreet, or Fundrise.  

Real estate debt funds consist of capital supported by private equity and finances prospective real estate buyers or current owners (like hard money lenders). The most common real estate projects where investors use real estate debt funds include industrial buildings, multifamily units, and commercial construction projects.  Real estate debt funds have recently been experiencing rising interest from investors. The strong competition is leading to the rise of large debt funds grabbing a huge portion of the market share.  While real estate debt funds might be a small niche, they are quite profitable.  

Money is a tool and the key is to leverage it. Investing in real estate debt funds allows cash to be leveraged to generate income to fund future real estate projects. If you invest in a real estate debt fund, you receive regular monthly or quarterly payments from the interest charged on the loans.

Real estate debt funds are common with people who don’t qualify for funding from traditional lenders. They also have friendlier terms compared to conventional lenders. For these reasons, real estate debt funds tend to be popular with people in entangled financial situations or who can’t access conventional funding.

The most common loan types in real estate debt funds include:

  • Construction Loans
  • Property Renovation/Redevelopment Loans
  • Bridge Loans

Benefits of Investing in a Real Estate Debt Fund:

  1. Passive Investment. Real estate debt funds are one way of passively investing in real estate. If you decide to invest in a real estate debt fund, your income will be generated through interest charged on the borrowed capital.
  2. Consistent income.  The primary advantage of investing in a real estate debt fund is consistent income and stable returns on the investment. Payments are usually provided every month or every quarter. Your investment can also generate income in case the borrower defaults on payment. The real estate debt fund is entitled to the property used as collateral during the securing of the funds. If the borrower obtained the funding for a commercial building construction project, then the property becomes available to the fund when the borrower defaults. Interest rates vary depending on the debt fund. However, the average interest rate is about 9%. The interest rate is usually spread out in monthly repayments.
  3. Balance real estate investment portfolio.  Investing in real estate debt funds is a great way to balance your real estate investment portfolio. They are a low-risk investment option, which allows you to lower your investment portfolio’s risk and earn a regular income as you wait for other investment options to pan out or build capital to fund other investment options. Additionally, Real estate debt funds can help you hedge against losses.
  4. Diversification. Investing in a real estate debt fund is a great avenue for diversification because the capital is used in various projects at the same time. This means that if any particular project fails then you shouldn’t have to worry about losing a significant amount of money.

This blog is part of a Building a Legacy Wealth Portfolio series:

Legacy Wealth Portfolio: Commercial Real Estate

Building a Legacy Wealth Portfolio: Index Funds

Building a Legacy Wealth Portfolio: Vacation Rentals

If you want more information on commercial real estate investing or need help with creating a legacy wealth budget for your household, please do not hesitate to contact me for help.

Charleese Hasan, PhD, The Budget Dr, Accredited Commercial Real Estate Investor, OH Charlie LLC:

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