In a high-interest environment, it’s more important than ever to be selective about the assets you choose to invest in.
Just because an investment delivered high returns for you last year or even 6 months ago does not necessarily mean it’s a strong opportunity to invest additional capital in today.
However, one asset class that we do believe is positioned to deliver strong results for investors in the coming months is real estate debt. In this article, we’ll compare this investment opportunity to other common debt investments and weigh the pros and cons of each.
What is Real Estate Debt, and How Does it Work?
The concept of real estate debt is quite simple: rather than investing in a property for equity, you invest in the loans used to fund a residential or commercial real estate project.
These loans generally hold first lien rights, similar to the function of a bank mortgage loan. They’re also relatively short-term, usually between 12 and 24 months.
Currently, real estate debt rates are around 8-12% annually. If for example, you invested $100k today — assuming a 10% return — in 3 years you would have around $130k. This is double the returns of CD and bonds, two other common debt types.
Real Estate Loans vs. Bonds
Bonds are a popular passive investment because they’re seen as relatively stable and low risk. However, the trade off for that stability is typically a lower rate of return, especially for long-term investments.
Today, high-quality AA corporate bonds with 3-year terms are seeing rates around 4.5%, and high-quality AA municipal bonds with 3-year terms are around 3.6%. If you invested $100k in an AA corporate or municipal bond at these current rates, in 3 years you would have around $111k-114k
If, however, you invested that same $100k into real estate loans, you would have around $130k in 3 years.
Real Estate Loans vs. CDs
CD rates — a fixed interest rate you can receive for putting money into an account for a fixed amount of time — have been higher than usual in recent years, but they’re still not nearly as high as they were in the 80s.
These rates will vary depending on the bank you work with and the terms of your agreement, but most CD rates for a 3-year term are falling around 4.5% APY.
So, if you invest $100k today into a CD, in 3 years you’ll have around $114k. This is less than half of the return you can expect if you invest instead in real estate debt.
How to Invest in Real Estate Debt
With Avestor’s platform, investing in real estate debt is easier than ever. Simply look through our fund marketplace and find a fund that invests in debt deals and aligns with your goals and needs.
Once you’ve found a fund you’re interested in, you can use the fund’s contact form to set up a meeting with the fund manager. Unlike many other debt investments, our model allows you to get to know the fund manager personally, so you can feel confident allocating capital to their fund.
And with our customizable fund model, you have complete control over the deals you choose to invest in (and how much you’d like to contribute to each) within a fund. If you’re ready to learn more, visit our marketplace to start exploring and find the fund that’s right for you.