Real estate investors are more active than ever with low interest rates and a hot market. However, traditional banks are also more conservative than ever in the wake of the last recession and in the midst of a global pandemic. How can real estate investors fill the gap? By investing in real estate debt, hard money loans, or hard money loan funds—all commonly referred to as private lending.
Private lenders are funded by investors who get returns from the interest on the loans the lenders provide. It’s a win-win for all involved. If you’re thinking about investing in private lending, consider these four benefits.
1. Reliable Returns
Because private lenders maintain a portfolio of equity-based loans, even when some borrowers default, investors still get monthly or quarterly returns from the other loans that are performing. This is why many investors choose to invest in hard money loan funds, rather than just a single loan at a time. Just as with other types of investments, this type of diversification serves to mitigate risk for investors.
Hard money loans or debt investments are also at the bottom of the capital stack, which means they get paid back first. Loans are secured by the real estate, so if they don’t pay back the principal, the fund can foreclose on the property and sell it to recover the principal for investors.
2. Fast Returns
With debt investing, your money is only tied up for a short period of time—anywhere from six months to two years. Always be sure to check with the sponsor about the official terms and conditions so you know how long the lockup period is for the fund you are considering. Returns begin almost immediately, and you get a monthly or quarterly return for the duration of the agreement.
With debt investing, you get either a fixed monthly return on an individual loan or a steady return if investing in a mortgage fund. When you work with a fund manager that has rigorous underwriting and collections practices, you know that as long as you leave your investment where it is, you’ll get returns on it. Returns are also more consistent, so you can have a good sense of how much you’ll be earning each month or quarter.
4. Attractive Risk Adjusted Returns
Although no investments are completely risk-free, debt investing through a private lender can be relatively low-risk when the loans are structured with low loan-to-value ratios and proper underwriting. Of course, it’s also important to choose a lender that manages their portfolio in alignment with your risk tolerance, so learn about the types of loans they service and their use of leverage before you commit.
Even when borrowers default, the primary investment can often be partially or fully recovered. Because the loans are backed by equity, if the borrower is unable to make payments, the lender is able to foreclose on the property to recoup the loan and recover the investor’s principal. Also, because private capital lenders only loan a certain percentage based on the value of the property, there is additional loss protection if the property loses value. Diversification also helps reduce risk because your investment is spread across multiple loans, geographies, asset classes, and borrowers.
Invest with Socotra Capital
If you’re interested in real estate debt investing, Socotra Capital makes investing in hard money loans accessible and allows you to increase your fixed income yields without taking an outsized risk. Our rigorous underwriting process and low loan-to-value ratios protect your investment and give you the benefit of reliable monthly income. If you’re ready to learn more, the first step is to get access to our Investor Portal.