A Summary of Real Estate Debt Funds
Real estate debt funds consist of pooled private equity that is used to lend money to real estate developers. In many cases, these loans are secured by trust deeds, and so this form of investment is commonly referred to as trust deed investing.
A real estate debt fund, or “private money lender”, secures these loans using the subject property as the collateral for the debt. In the case of Brooktree Fund, all loans are backed by first trust deed positions.
The loans that private money lenders issue to borrowers (often professional real estate developers) provide short-term capital for real estate projects like multifamily buildings, commercial developments, and residential fix-and-flip projects.
Investors in these funds receive periodic payments for the associated interest charged against the capital that has been loaned.
- Investors provide capital to the real estate private equity fund
- The fund utilizes investor capital to originate and service real estate loans secured by trust deed positions
- Borrowers qualify for loans, use them for their stated real estate investment purpose, pay monthly interest, and pay off the principal upon the loan’s maturity
The Rise of Real Estate Debt Funds
Real estate debt funds grew out of the 2008 market crash and resulting regulatory changes. Traditional banking institutions who had served real estate developers prior to the financial downturn increased liquidity requirements, and in general, pulled back from asset-based real estate lending.
Many private lenders, including real estate debt funds, stepped in to provide asset-backed loans to commercial real estate investors and businesses. Today, real estate debt funds occupy a small but profitable niche in the world of commercial real estate lending.
Generating Income Through Real Estate Debt Funds
Real estate debt funds primarily generate income through interest. This interest comes from the capital that has been lent to borrowers.
On average, Brooktree charges our borrowers between 7-10% and collects interest payments monthly, passing the income along to our investor partners.
Brooktree’s operating income is derived from the borrower through origination, servicing, draw, modification, extension, or exit fees. As a result, we are able to pass the majority of interest earned directly back to you, our investors.
What Are the Benefits of Investing in Trust Deeds?
Passive Real Estate Investing
Trust deed investing can be a great way to earn interest on your money by investing in real estate without taking on the risks and responsibilities usually associated with real estate investing.
With trust deed investing, you can participate in the returns of real estate investing, but without the hassle of identifying, acquiring, fixing, maintaining, managing, and eventually reselling actual real estate.
Asset-Backed Investments
When you invest in trust deeds, you’re buying someone else’s real estate loan, which is secured by a trust deed.
Trust Deed investments are secured by a tangible property you can look at, and decide whether or not you would like to own the property if you foreclose on the loan.
Not only will you be able to get a solid rate of return, but you have added security because you either have a loan buy back agreement in place or you can sell the property tied to the loan in case the borrower fails to pay you back.
Consistent Returns
One of the benefits of investing in trust deeds is your ability to generate a reliable, fixed monthly return. If you invest in a trust deed that is based on a secure loan with a good borrower, you’ll be able to enjoy regular income, month-in and month-out, even while other financial markets go up and down.
Safer Than Other Investments of Comparable Yield
Trust deed investing is, by its nature, quite secure. This is because trust deed investing has a guaranteed yield. As well, the management of such loans and investments is backed by experience. As well, the risk is far less than the return one can receive from this type of investment.
Leverage Economic Cycles Hedge Against Inflation
Trust deed investing offers a return on investment that comes in at higher than average. The typical return of 9 to 14 percent is not uncommon for the trust deed investor. Another benefit is that trust deed investors can control both the structure of the loan and the interest rate.
References
- Investing in Real Estate Without Investing in Real Estate. RealtyMogul.
- Lake, R. (2019). Equity vs. Debt Investments for Real Estate Crowdfunding. Investopedia.
- Moylan, A. (2016). Debt Funds: The rise of real-assets lending. IPE RA Magazine.
- Segal, T. (2020). Pros and Cons of Investing in Trust Deeds. Investopedia.
