Accessing Real Estate Exposure Through Private Credit

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In times of market volatility, some investors look toward real estate as a safe haven for their capital as well as protection against inflation.

Owning real estate has many potential benefits, however, not all investors have the financial flexibility to have their money locked up for 10-plus years. Private credit offers these investors exposure to real estate, without the lengthy lockups while also providing distributions at regular intervals.

In our last blog post about the different types of private credit,  we highlighted bridge lending, however that is not the only way to access real estate using private credit. Below, the TIFIN Private Markets team shares insight on potential opportunities.

The target return profile for these funds is between 10-15% annually, however that can fluctuate based on market interest rates and the amount of leverage deployed by the fund.

Construction Loans: These are short-term, adjustable-rate loans that are used to complete the construction of a project. In Commercial Real Estate, once the project is completed, the loan is typically refinanced with a traditional mortgage. There are typically more capital calls associated with this strategy as construction loans are paid out over time to the borrowers as opposed to a lump sum loan.

Rehabilitation Loans: These loans are typically short-term with double-digit interest rates designed to be paid off as soon as possible by the borrower. When evaluating these funds, be sure to understand what happens with the property in the event the borrower defaults.

Traditional Mortgages: The potential benefit of investing in a fund that originates their own mortgages is that there is transparency in the underwriting process and that the investor can see exactly what loans are in the portfolio, as opposed to Collateralized Mortgage Obligations (CMO) where the instruments are packaged into tranches and sold on the secondary market.  These loans are typically riskier than other mortgages since borrowers tend only to turn to private financing if a conventional loan is unattainable for some reason.   

Further Considerations

Some funds use leverage as a way to increase their return profile. One thing to note when employing leverage in a period of rising interest rates is that default rates increase as well. Since the fund’s cost of capital also increases with rising rates, there is an increased chance that a poorly performing property will cannibalize returns, especially if it goes into default.

Getting Started with Private Credit

TIFIN Private Markets offers a collection of curated alternative investments spanning private credit, hedge funds, private equity, real estate and more. To learn more about accessing private credit through TIFIN Private Markets, we invite you to schedule time with our team.

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