Private Real Estate Debt vs Credit vs REITs: A Simple Guide
Private real estate debt offers certain advantages over REITs for accredited investors. Learn more about these different types of investments.
While anyone with the means to do so can invest in the stock market or other publicly available investment opportunities, private investments often allow investors to take a more hands-on role. Investments in private debt or private equity place investors closer to their investments, especially in comparison to something like an investment in a publicly traded stock.
Private debt investments help fund secured loans used to purchase or renovate real property, while private equity investments provide capital to businesses or business ventures. This article will focus on these types of investments in the context of real estate. Investors may also be able to put their money into public investments known as real estate investment trusts (REITs).
Read on to learn more about how private investments differ from investments in REITs, as well as the potential benefits of each.
Photo by Tyler Franta on Unsplash
What are the different types of private investments?
Several types of private investments may be available to accredited investors.
Private debt investments
The term “private debt” may refer rather broadly to loans that come from private businesses or individuals rather than banks. A loan between two individuals may be considered a private loan, as well as a loan from a company engaged in the business of making private loans. This article will focus on the type of private loans that come from businesses.
Investors provide funding for private lenders to make loans. Their returns come in the form of interest payments from borrowers. In private real estate loans, such as hard money loans, the lender puts a lien on real property to secure the loan and protect the investors.
Private debt vs. private credit
The term “private credit” often appears alongside “private debt.” The two are essentially the same. Both involve loans from sources other than banks or other financial institutions, and both get their funding from investors.
Private equity investments
Private equity investments involve contributing capital to a business in exchange for an ownership stake. Investors put money into funds managed by private equity firms, which then purchase shares in corporations that are not publicly traded. A private equity firm could also buy enough shares in a publicly traded company to take control of it and take it private.
Venture capital (VC) is one type of private equity. VC firms and many other private equity firms may produce returns for their investors by working to increase a company’s profitability and value. Some private equity firms, however, might seek returns by other means, such as by cutting costs at the company or selling off assets.
In the context of real estate, investors can invest in funds managed by private equity firms that invest directly in real estate projects. This might include managing properties, renovating and selling properties, or developing new properties.
Private debt vs. private equity
In both private debt and private equity investments, the investors do not take an active role once they have contributed money. Private lenders and private equity firms handle the day-to-day business.
One of the key differences between private debt and private equity involves the lifespan of an investment. Private debt investments often have a fixed time period associated with them. Investors often expect to recoup their capital (along with interest) by a particular date. Private equity on the other hand, does not necessarily have due dates or deadlines.
What are real estate investment trusts?
REIT investments are typically more liquid than private debt or private equity investments. As REITs are sold on the stock market, investors can buy and sell at their own discretion. Non-accredited investors have more opportunity to participate in REITs. The downside of REITs, compared to private investments, is your ability to closely target the exact kinds of real estate you’re invested in. Plus, you probably won’t know the fund managers on a personal level.
A REIT is a business entity that owns and operates real estate to generate income. Investors buy shares in REITs. Returns on investments often take the form of dividends, similar to the dividends that corporations pay to shareholders. REITs typically focus on properties that are likely to generate consistent returns, such as the following:
Apartment buildings
Office buildings
Retail centers
Warehouses
Storage unit facilities
When comparing investing in a REIT vs. direct real estate investment, the comparison to owning shares in a corporation also applies. REIT investors do not participate in buying, selling, or managing real estate.
Many REITs are publicly traded. Shares are available to the general public, and shareholders may sell their shares with few or no restrictions. Publicly traded REITs are typically listed on one or more stock exchanges.
How are private investments different from REITs?
Private real estate investments differ from REITs in several important ways, many of which make private investments ideal for savvy investors.
Stability
As publicly traded securities, the value of shares in REITs often follow larger market trends. If a stock market is up, REIT shares are likely to be up as well. When the market is down, so are REIT share values.
Private investments in real estate have some cushioning from the day-to-day whims of the market. A bad day in the markets will not have as profound an effect.
Information and decisions
Private real estate investments keep investors closer to their money, in a matter of speaking. The companies that offer private investments, such as private lenders, offer a great deal of information about real estate finance funds and other opportunities. They keep investors in the loop about how their loans are performing, while REITs often keep investors at arm’s length. Many investors feel much more confident doing business this way.
Local vs. broad focus
Private estate funds frequently target specific geographic areas. This hyper-local focus allows investors to put their money into a city or neighborhood they know, care about, and/or believe in. REITs often cast a broader net, purchasing and managing properties across a wide area.
Liquidity
One feature in which REITs might offer an advantage is liquidity. Investors can sell their shares in publicly traded REITs rather easily. Divesting from private real estate can be more complicated. An investment in a private real estate finance fund is not something an investor can easily sell or cash in while loans are outstanding. Once the loans are paid in full, though, they can recoup their original investment.
Find out more about investing with Capstone
Investments in real estate financing can produce excellent returns. Since real estate is a “hard” asset, it can secure hard money loans and reduce investors’ level of risk. Capstone Capital Partners offers trust deed investments and first lien investments that target a return of 10% net annual yields. To learn more about Capstone’s investment opportunities, contact the team today through the online contact form.
