Taking advantage of the current opportunity in the private real estate debt market can be easy. The most direct option is to invest in individual trust deeds.
As an investor in a trust deed, you are the lender, and your investment is secured directly on the underlying property securing the loan. The borrower pays you directly, often in monthly installments, until such time as they pay off the loan. If the borrower is unable to make the payments or pay off the loan in the agreed upon time, you (the investor) have the option to foreclose on the property and get your original principal returned.
The second option offers a more diversified approach. Instead of investing in a single trust deed, you can invest in a portfolio of loans. known as a mortgage REIT. This option is often considered a much more passive approach to investing in private real estate debt.
The advantage of the mortgage REIT is that your investment is diversified. If one of the underlying mortgages stops paying or pays off, your monthly income isn’t disrupted because the other loans in the portfolio continue paying. Additionally, when investing in trust deeds, you are required to find each investment opportunity and then manage incoming payments, monthly statements, etc. This involves considerable administration work for the investor that is often undesirable. With a mortgage REIT, the fund manager is responsible for selecting loans, due diligence, and managing the collection process.
Another advantage of a mortgage REIT is that you can control the amount and timing of your investment. With a trust deed investment, your investment is based upon the size of the individual loan and when that loan is funding. If the loan size doesn’t match your available capital, you may need to pass on the opportunity leaving you with no income until such time as you identify a matching loan. On the other hand, the mortgage REIT allows you the flexibility to invest nearly an y amount on your schedule.
Lastly, one of the biggest advantages of the mortgage REIT over a trust deed investment is that you are eligible for a 20% tax deduction on the income. Known as the Qualified Business Income Tax Deduction or the acronym QBIT, the deduction was added to the 2017 Jobs and Tax Act. It allows income earned through a pass thru entity (such as a mortgage REIT) to be eligible for the deduction. Furthermore, because the income is generated through a REIT, the income isn’t subject to an income cap.