Insights Article | August 30, 2022
Private Credit Investing: The Benefits of Investing in Real Estate Without Buying Property
Investing in real estate is one of the best ways to accumulate wealth. It’s a real, tangible investment that offers portfolio diversification and historically has been non-correlated to the volatility of the stock and bond markets. However, many investors who want to invest in real estate do not want the hassle of having to purchase and manage multiple properties. That’s where trust deed investing comes in.
Private credit investing (or investing in trust deeds and mortgages) is investing in loans backed by a hard asset—real estate. Like a mortgage, a trust deed (or deed of trust) is the security instrument where a borrower pledges the property for the repayment of a loan. These are often short-term loans with maturities ranging from three months to three years.
The benefit of targeting investments with a shorter time horizon is the ability to respond to market conditions sooner, such as the state of the economy, interest rate fluctuations, and market demands. In addition, short-term loans can, offer greater yield to investors and create greater potential liquidity if loans are paid off more quickly.
With regular ebbs and flows in the market, private credit investments in trust deeds and mortgages serves as a portfolio diversifier to hedge against inflation and market volatility. It provides significant downside risk protection and the ability to earn above average annualized returns, typically between 5.5% to 8%, possibly higher.
Not only are private credit investments in trust deeds and mortgages an ideal way to provide portfolio diversification but investing in a private debt fund that pools investments to lend on multiple loans creates the opportunity to diversification across property types, borrowers, geographical location, loan terms, and other factors, adding yet another layer of diversity to the investment structure. Further, investing in a fund can offer greater efficiency when making investments, greater liquidity, and professional management.
Compared to other investment options with similar risk profiles, returns on private credit investments in trust deeds and mortgages at lower loan-to-values are very favorable because the lower relative risk and margin of safety to help protect the investment.
By investing in short-term deeds of trust and mortgages in the first lien position with conservative loan-to-values, the investments have a protective equity cushion that helps to provide downside risk protection to buffer against fluctuating property values or borrower performance. If a borrower defaults on a loan, the investor (as the lender) may foreclose on and sell the property to recoup this investment. When the property is worth more than the loan, there is a layer of protection for the investor.
Stable Returns, Monthly Income
For investors looking for a fixed income investment, private credit investments in trust deeds and mortgages can offer more consistent returns that can generate a steady stream of monthly income that is not correlated to the fluctuations of the stock and bond markets.
As a passive investment opportunity, private credit investments in trust deeds and mortgages through a fund offers investors the benefit of earning returns through the interest generated from the loans. Investing through a fund saves investors time and the trouble of personally identifying and evaluating loans, negotiating terms, and managing and maintaining the loan portfolio.
By partnering with a fund manager who brings lending, finance, banking, legal, and portfolio management expertise to the table, investors also have the benefit of professional management to help manage and mitigate the risk and responsibilities otherwise associated with trust deed and mortgage investing.
Are There Any Downsides to Private Credit Investing?
While the benefits of private credit investing in trust deeds and mortgages outweigh any drawbacks, there are some to consider. Most trust deed and mortgage investments are illiquid because the borrower is not obligated to fully repay the loan until maturity. Conversely, while a fund may offer greater liquidity, often there is a one- to two-year lock up period. This means that investments made into the fund cannot be converted to cash immediately, so investors will need to commit to the initial investment period.
In addition, unlike investing in traditional real estate or in the stock and bond markets, there is little opportunity for capital appreciation because investor returns are based on interest produced from the loans.
Lastly, there is the possibility that a borrower could default on a loan. However, if the investment is structured properly, there are safeguards and strategies in place to take swift action to protect and preserve the principal investment in the loan.
Filling a Gap in the Market
Private credit investments in trust deeds and mortgages have come as a welcome alternative investment opportunity in recent years, as more turn from traditional banks to private lenders to finance real estate deals. Following the 2008 financial crisis, private lenders have filled a gap by providing short-term bridge loans with greater speed, flexibility, and efficiency.
With a healthy demand for short-term bridge loans in today’s lending environment, the boon to private credit means investors are more easily able to participate in this investment class.
How Private Credit Investing Works at Wilshire
At Wilshire, our conservative investment approach and risk-mitigation strategies are the centerpiece to investor appeal. Loans in the WFP Income Fund are secured by seniors housing, healthcare real estate, multifamily, and commercial real estate, which generally have a 35% protective equity cushion. In other words, the loan Wilshire makes to a borrower is approximately 65% of the value of the property, meaning there is a lower risk of losing principal.
In addition, the WFP Income Fund is not correlated to the stock or bond markets and has little to no sensitivity to interest rates. That have historically resulted in a stable net asset value (NAV). This means that the WFP Income Fund can help protect against market volatility resulting from economic surprises.
Investors seek investment in the WFP Income Fund because it offers passive income, more stable monthly cash flow, and the confidence of knowing that their principal is backed by a hard asset—real estate.
Learn more about Wilshire’s investment opportunities or call (866) 575-5070 to speak with an investment advisor.