Borrowers in a real estate debt fund can obtain short-term financing for a variety of commercial real estate projects, so they are almost always developers or experienced real estate investors. Real estate projects that can be invested in through a real estate debt fund include construction loans, multi-family structures, and industrial buildings, to name a few.
A traditional real estate debt fund is made up of equity-backed funds that can be distributed to both property owners and potential buyers. In general, anyone who invests in this type of fund will receive monthly payments from the interest charged on the capital as well as security levied on the assets of a property. Each debt fund is usually devoted to a single investment strategy. Some funds, for example, will focus on specific asset classes. Before you begin investing in commercial real estate debt funds, you must first understand what they are.
Understand Commercial Real Estate Debt Funds' Role in Commercial Property Financing
Debt funds frequently make loans to commercial real estate borrowers that banks cannot or will not make, such as commercial construction loans, bridge loans or lease-up finance, and certain property rehabilitation and redevelopment loans. According to the Mortgage Bankers Association, commercial real estate debt funds originated nearly $70 billion in commercial real estate loans in 2018, accounting for roughly 10% of all CRE loans. That is more than twice the amount of commercial mortgage debt funds issued in 2016. Some debt funds are managed by private equity firms, while others are open to the general public. Debt funds, like commercial mortgage-backed securities, are segmented based on the credit risk of different loan groups. To make a more informed decision, you should understand the distinction between mezzanine and senior debt and contact PACE advisors.
Investing in a Real Estate Debt Fund Has Benefits
The most important benefit of considering investing in a real estate debt fund is that these investments frequently provide consistent returns and payments. A real estate debt fund is an excellent investment option if you work with the right fund management company, whether you're attempting to balance a high-risk investment or are currently sticking to low-risk ones. Remember that you will most likely be paid on a monthly or quarterly basis.
Investing in a real estate debt fund also secures your capital stack. This is a senior loan, which means that your investment will take precedence over all other types of investments for the property in question. This is a good way to diversify your portfolio while also lowering your risk. Debt funds, which invest in multiple projects at the same time, are another way to diversify your portfolio. Because your funds are spread out across multiple projects, the failure of one should not result in a significant financial loss.
All of this suggests that debt funds are becoming a more appealing option for commercial borrowers, particularly those looking for construction and bridge loans for higher-risk properties.
