Investing in short-term real estate debt has long been considered a great investment for those seeking consistent monthly cashflow and the security of real estate. As an investor in real estate debt, you are acting like a bank. It involves lending money to real estate investors and operators using their real estate as collateral.
Let’s use the example of a real estate investor seeking a short-term loan to purchase a single-family home with the intention of renovating and selling it for a profit; this is a strategy commonly referred to as a residential fix-and-flip in San Diego. In this scenario, you are the investor, commonly referred to as the lender, who would fund a loan to the borrower. The loan is secured with a mortgage (also referred to as a deed of trust) on the property that the borrower owns or is purchasing.
In exchange for the loan, the borrower would make monthly payments over the duration of the loan and once they sold the property, you would be returned your original principal investment and any remaining interest payment.
Real estate investors borrow from a private lender because traditional banks have become very conservative in their lending. They are looking to fund longer term loans to borrowers that intend to occupy the property as their primary residence or who have very good credit and/or cashflow. Today, banks are extremely risk adverse. Because real estate investors investing in Deeds of Trust San Diego tend to have unpredictable cashflow as they are constantly buying and selling properties, they are not considered the ideal client for a bank.
Another reason why one would invest in private real estate debt is because it is short term. Ironically, by funding short term real estate loans, investors are more protected by the risk that the value of the underlying property securing the loan will lose value over the term of the loan. Another advantage of a short-term loan is that it’s semi liquid, as the investor can expect to have their investment return in 12 to 24 months.