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Is Real Estate Private Lending or Fixed-Income a Better Investment?

Private lending isn’t new, but it has seen a surge in growth in the last couple of decades. Since the financial crisis of 2008-09, private debt investing has grown to be a $638 billion dollar asset class. That was in 2017.

More than half of the assets under management are direct lending assets.

Both direct lending and private lending are poised to see even more growth soon as high-net-worth individuals search for ways to grow their incomes, diversify their portfolios, and support young entrepreneurs and mid-sized businesses with good products and services. The real estate private lending sector will be a large part of that growth. But what can investors expect from the differences between private real estate lending and fixed-income investments? Let’s find out.

Direct Lending Offers Higher Returns Than Fixed-Income Investments

While direct lending is still a relatively unknown asset class, it does see strong returns. In fact, JPMorgan puts it close to leveraged lending in terms of size and strength. Their data shows that direct lending has outperformed real estate commercial mezzanine lending, commercial real estate senior debt, and several classes of U.S. bonds.

As of May 31, 2022, 10-year Treasury bond yields were at 1.7 percent. Investment grade bonds were at 2.1 percent while U.S. infrastructure debt and U.S. high-yield bonds returned 3.1 and 4.0 percent, respectively. As of September 30, 2021, commercial real estate senior bonds yielded a return of 4.2 percent. Mezzanine debt did better at 6.0 percent. But direct lending topped them all at 8.8 percent.

Private credit returns higher yields because it is a riskier investment. There’s no credit rating agency that measures the risk and credibility of private lenders. While riskier, investors often experience greater returns.

In terms of long-term yields, commercial real estate has performed better than the S&P 500 over a 25-year average, based on data compiled by the National Council of Real Estate Fiduciaries. By the same token, real estate investments in other sectors have done quite well. In fact, self-storage has been the best-performing sector for the past two years, according to the Visual Capitalist.

That’s not to say that other real estate sectors have underperformed. Residential real estate yielded 45.8 percent for investors in 2021. Industrial real estate yielded 45.4 percent and retail yielded 41.9 percent.

The real estate sector looks good both short-term and long-term. There’s still a high demand for housing coupled with a low supply while there has been a recent slowdown in construction. Home prices are going down as mortgage interest rates rise. All that means that real estate investing is still a strong sector even as priorities shift for investors operating in the market.

Investors looking for higher yields need only look at private lending and real estate, but these aren’t exclusive investment verticals. In fact, today’s investors can get the best of both worlds through real estate private lending platforms like Sharestates.

In short, direct lending, private lending, and real estate lending are showing strong resilience to the current market and look to be strong asset classes in the near to mid-term future.

Private Lending is One of the Many Faces of Real Estate Investing

Real estate investing comes in many different forms. A lot of investors are familiar with the old brick-and-mortar models including fix-and-flip, single-family rental properties, and multifamily rentals. But these are just a few ways that investors have of approaching the broad field of real estate investing.

Other types of real estate investing have the potential to earn bigger rewards. These include:

  • Real estate investment trusts (REITs) – REITs have shown themselves to be more resilient during the recent economic downturn than stocks.
  • Residential fix and flips – Fix and flips allow investors to make short-term profits. While risky, fix-and-flip investing can lead to big short-term gains for investors. Cash investors can usually pick up great deals while some investors leverage short-term loans such as bridge loans and hard money loans to increase their returns and expand their portfolios.
  • Commercial real estate Commercial real estate is a specialized niche that often produces great returns for investors with a solid strategy. The retail sector offers great opportunities, especially with the rise of e-commerce.
  • Industrial real estate – Industrial real estate investors may hold onto properties for a long time before they’re able to sell or lease their properties, but it can be quite lucrative.
  • Raw land – Land speculation is another real estate investing strategy that requires a lot of patience. Investors can hold properties for years before selling them to the right buyer, but if land values go up between the time you buy and the time you sell, you could see a very big payday.
  • Private lending – Real estate private lending can take many forms from 100 percent crowdfunding to partnership lending. There are platforms that service accredited investors only and others that allow anyone to participate. Opportunities in private real estate lending continue to grow as more people seek to diversify their portfolios and increase their returns.

Which investment strategy is right for you? Only you can say. Every investor should perform their due diligence, stick with their areas of strength, and analyze the deals to ensure they offer the right potential rewards for the risk involved.

Every real estate market is local. Even online real estate lending is based on local market dynamics. Be sure to analyze the market conditions in the markets where your real estate properties are physically located.

While fixed-income investments may be more predictable, real estate investing can offer bigger returns for the investor willing to take the risk. In fact, the best returns in real estate often follow recessionary periods. It’s not a matter of either/or. There is no reason investors ready to diversify their portfolios for stronger gains can’t maintain a portion of their portfolios with fixed-income investments while moving some of their investment returns into real estate and more lucrative alternative investments.

As with any investment, never invest more than you can lose, and do your due diligence. There’s no guarantee an investment will produce returns but mitigating your risk through the proper research and investment strategy can be very rewarding in the long term.


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