What Is A Real Estate Lending Fund And Why Should You Consider It?

What’s the deal with real estate lending funds? There are a number of ways to invest in real estate. Most people think of real estate as single family rentals and REITs.  But it also includes commercial real estate such as multifamily apartment buildings, industrial warehouses, office buildings, and retail.  All of those investments are equity positions where investors profit from appreciation or value-add propositions.

The flip side of equity is debt.  Debt investors function much like a bank by lending money to real estate developers.  A private real estate lending fund raises capital from accredited investors and lends it out to borrowers.  The profit is in the interest rate on the loan as well as points on the loan and other fees.  Debt investors are attracted to a steady source of income which payout a higher yield than other fixed income vehicles such as savings, bonds, and dividend yielding stocks.  In addition, this type of alternative investment is uncorrelated to the stock market.

Real Estate Lending Funds: Nuts and Bolts

Private first deed mortgage funds are private placement investments so that means these are not traded on the public market.  Funds are structured as LLCs, limited partnerships, or private non-traded REITs. Investors must qualify as accredited investors.  That means having a net worth of $1 million or more not including the value of the investor’s primary residence; or an annual income of $200K (or $300k together with a spouse) in each of the prior two years, and the expectation of the same in the current year. 

When evaluating these funds, the most important thing is to look at their track record.  Unfortunately, many of these funds don’t have a long history of operation, and few were in existence prior to 2008.  Find out their default and foreclosure rates. Make sure the fees are standard and reasonable.

The other major consideration is whether the fund employs leverage or not.  An unleveraged fund will be less risky, but generate lower returns. A leveraged fund will be riskier but potentially be more profitable.  

Ask about the quality of the borrowers.  Are they amateur fix and flippers who’ve only done a couple of doors, or experienced professional real estate developers with dozens of deals under their belt? The quality of the borrower matters.

There are a number of companies out there that specialize in this type of investment including us over here at Real Estate Funding Solutions. Send us an email at info@realestatefundingsolutiions.com to learn more about how we can help you.

Leave a Comment

Your email address will not be published. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.

Scroll to Top
Open chat
1
Need Help?
What type of financing can we assist you with today?
Share via
Copy link