Private lending for real estate occurs when an investor uses their own capital in order to lend money to individual investors while securing the main property with a mortgage. This capital can also be placed into a managed real estate fund. Private lending is considered to be a viable alternative to large banks and similar financial institutions. In many cases, private lending for real estate is a relatively safe investment since the investment is backed by a mortgage.

If you don’t want to be a landlord or go through the lengthy and time-consuming process of flipping properties yourself, private lending is a great way to invest in real estate. The payments that you receive from the borrower will include interest that can help you obtain consistent returns on your initial investment. If you lend money to a flipper as opposed to flipping a property yourself, you’ll typically have much less work to do, which means that there will be less stress and risk involved during the process.

If you purchase the property yourself, you would have to flip the home on your own. While doing so could net you a high return, it’s a risky process if you’re not completely confident about what you’re doing. If you’re searching for ways to invest in real estate without being required to manage the property, you should consider private lending. This article goes over things you need to know about private lenders for real estate as well as the types of borrowers you could lend money to.

How to Become a Private Lender for Real Estate

planted money in garden

If you want to become a private lender for real estate, the process is relatively straightforward. First, it’s recommended that you start making these investments locally so that you can meet with borrowers face-to-face while also visiting the property in person. This will give you much-needed experience in identifying the right properties and investing in borrowers you can trust. If you start investing on a larger scale where you are unable to meet face-to-face with borrowers or won’t have the opportunity to visit the property that the borrower is purchasing, it’s possible that you could make mistakes during the process that could lead to you losing a significant sum of money before you’ve had a chance to learn the ins and outs of private lending.

Because of how important it is to choose the right borrower and the right property, it’s highly recommended that you perform an extensive amount of research into these aspects. Even before you conduct a face-to-face meeting or visit the home, you should research these components to better identify ones that would make wise investments. Doing research is also going to be essential once you start lending to borrowers in other states, which is why you should get started as soon as you’ve confirmed your interest in private lending. The different types of private lenders that partake in these investments include:

  • Investors with surplus capital
  • Investors who are looking to diversify their portfolios
  • Investors who have a large retirement savings account
  • Retirees who want to make passive investments in real estate

Questions Private Lenders for Real Estate Should Consider

Before you engage in private lending, there are some questions that you should consider. First of all, it’s important that you do your due diligence. Before you provide money to a borrower, you should check with a lawyer to make sure that all of the documentation is legitimate and without error. You should do research to find out if the borrower has had success in the past with other investments. If you’re thinking about providing a loan to someone who flips houses, you likely don’t want to lend to an individual who has been relatively unsuccessful in flipping homes. You may be able to check the credibility of the buyer through your own network.

It’s also important that you understand exactly what the borrower is going to be doing with the money. If you make a loan without being certain about what the borrower is going to do once they purchase the property, you may find that a relatively safe investment has quickly become much riskier. Without asking for this information before providing the investment, you might believe that the borrower is intending to rent out the property when instead they are going to be flipping the home, the latter of which is typically riskier. Once you identify what the borrower is going to be doing with your loan, make sure that they have experience with that kind of investment.

Private Lenders for Real Estate Should be Cautious

stacked coins with clock in the background

You should also ask yourself if the numbers are realistic. If the borrower is asking for a certain amount of money, make sure that this amount will be used for the intended purpose of the investment. All applicants for private loans will be required to provide their own research on the property that they are looking to flip. This research will include the value of the home as well as the budget for the renovations, which can help you determine if providing them with a loan is the right decision.

However, it’s important to understand that nearly every applicant will overestimate the value of the home while underestimating the budget for renovations at the same time, which can make your loan seem much less risky. As such, you should check out the value of the home on your own to make sure that it matches the estimate provided by the borrower.

One of the last things to do is to look at the interest payments that the borrower is offering when asking for the loan. Borrowers want the lowest interest rates imaginable. If they happen to offer 20 percent interest payments, there’s a good chance that there’s something wrong with the deal that you might have overlooked. If the loan terms appear to be much more beneficial to you than they are to the borrower, you may want to avoid making this deal. It’s possible that there’s a much higher risk of making such an investment than you initially realized.

Types of Borrowers

two people shaking hands

There are several different types of borrowers that you can provide a private loan to, which include rehab/sell borrowers, rehab/rent borrowers, and commercial investors.

Rehab/Sell: This type of borrower usually purchases residential properties with the intent of completing renovations and improving the value of the property. Once the renovations have been made, they will quickly resell the property. The main reason that private lenders are considered to be more willing to lend money to individuals who want to flip homes is that banks are wary of lending money when it involves properties that are currently in poor condition.

Rehab/Rent: This borrower will typically buy residential properties in order to make necessary renovations that will improve the quality and value of the property in question. When the renovations have been completed, the property will be rented out in order to obtain a consistent cash flow.

Commercial Investors: These are investors who are seeking private money for what’s known as a bridge loan. This type of loan is used to purchase a commercial property when a standard bank will not lend on an unstable asset. Keep in mind that a bridge loan is usually a short-term loan that can last for anywhere from two months to three years. As such, this specific type of loan can come with some risk.

Private Lenders and Commercial Real Estate

person signing document

Are you looking for ways to diversify your portfolio while minimizing risk? If so, becoming a private lender for commercial real estate is a great way to minimize the amount of risk that comes with investing in a property. Since you won’t be flipping the home yourself or renting out the property to tenants, you will be able to receive consistent returns without the time that comes with managing the property. Before you get started with investing in commercial real estate, it’s important that you understand what these investments entail. While you won’t be required to manage a property, you will be tasked with completing comprehensive research to make sure that the borrower is legitimate and that the property is a good investment.

*Disclaimer: The statements and opinions expressed in this article are solely those of AB Capital. AB Capital makes no representations, warranties or guaranties as to the accuracy or completeness of any information contained in this article. AB Capital is licensed by the Financial Division of the California Department of Business Oversight as a California finance lender and broker (DBO Lic. No. 60DBO-69427). AB Capital makes money from providing bridge loans. Nothing stated in this article should be interpreted, construed or used as legal, financial, investment or tax planning advice, or a substitute for thorough due diligence and the exercise of sound independent judgment. If you are considering obtaining a bridge loan, it is recommended that you consult with persons that you trust including but not limited to real estate brokers, attorneys, accountants or financial advisors.

Mezzanine capital is a type of financing that’s comprised of part equity and part debt, which typically allows investors to seek higher than average returns . If you invest in mezzanine capital, you will be able to enjoy the best aspects of senior debt and equity. When looking specifically at the basic capital structure of a building or property, the top of the stack consists of equity holders, which include common equity and preferred equity holders. Below these two levels are mezzanine debt and senior debt.

If you make an investment into a property with senior debt, you take priority over anyone else within the capital stack. When the property performs well, you will be paid before anyone else with the interest payments that are received from the property. If the property doesn’t perform well, senior debt holders can start the foreclosure process or obtain ownership of the property in question. Holders of common equity often take on the most risk since they are paid last, which means that they may not be able to recoup their initial investment if the property fails. However, holders of equity and preferred equity are able to receive higher returns than anyone else in the capital stack. If the property performs well, common equity investors will receive regular payments from the cash flows of the property.

piggie bank with coins

Both mezzanine debt and preferred equity are forms of hybrid capital. While mezzanine debt isn’t secured by the property, it is secured by ownership interest. Holders of mezzanine debt do have some limited foreclosure rights as well. When you’re looking to invest your money into different properties, mezzanine debt often allows you to seek higher interest rates than senior debt holders. This form of debt usually comes with a shorter term of 6-24 months. Since you will also hold some of the borrower’s equity interest, you can foreclose on this portion of the property in the event that the borrower defaults. If you want to get started with real estate investing and are interested in taking on some mezzanine debt, the following article offers up a look at the basics of mezzanine capital.

What is Mezzanine Capital?

debt coins increasing

Mezzanine capital is a type of financing that’s made up of part equity and part debt. While senior debt holders use the property as collateral, the mezzanine capital investment is made against the property cash flow. Once you invest in mezzanine debt for a specific property, your returns will be largely dependent on the cash flow from the property in order to receive repayment for the principal of the loan.

This typically means that you will need to have patience when dealing with the borrower. While you’re taking on more risk than a senior debt holder, your returns will often be higher and can range from 12-18 percent each year. The equity from this investment usually comes in the form of a warrant, which allows you to purchase actual equity in the property at a later date. If the property happens to be highly successful, the equity that you purchase may provide you with high returns.

The best aspects of mezzanine capital include the regular cash returns that you should receive along with the potential for high returns over the length of the loan. Unlike preferred equity or common equity, this type of investment has low volatility and provides you with some protection in the event that the real estate project fails or the borrower files for bankruptcy. Since around 65 percent of the returns from a mezzanine investment are generated from the contractual interest that the borrower pays, the overall risk of the investment is reduced. Even if you don’t receive any return from the equity that you’ve purchased, most of your initial investment can be recouped with mezzanine capital.

Risks of Mezzanine Debt

chess game risk

There are several risks that you should be aware of when you invest in mezzanine debt. It’s important to understand that a mezzanine debt investment is going to be structured as a long-term investment, which means that there’s less liquidity with this investment type. It’s very difficult to liquidate a mezzanine debt loan until it has reached maturity. If the property fails, senior debt holders will have access to any remaining funds and assets before you.

If the borrower defaults on the property, the only protection that you have comes in the form of the guarantees that you initially received from the borrower. In general, this is the ideal investment type if you want to have a mixture of risk and consistent returns. While senior debt investments are safe, they don’t always garner high returns. If you invest in preferred or common equity, you may be taking on more risk than you’re comfortable with.

The primary characteristics of mezzanine capital include:

  • Investment is made against cash flow
  • Regular cash payments
  • Low volatility
  • Extensive downside protection
  • High returns
  • Warrants
  • Potential collaboration with senior debt holders

How Does Mezzanine Capital Work?

interior of restaurant

If you want to make an investment with a local restaurant, you will first need to identify how much operating income that they receive. Let’s say this operating income is $300,000 per year and that you receive a purchase offer from the owners for $1.2 million. If you don’t have this amount of money in your bank account, you could turn to a senior lender to contribute around $800,000 of the $1.2 million price tag. This would leave you with $400,000 in equity that you would need to pay. If you made this investment, you could receive more than 18 percent in yearly returns.

However, you can choose to reduce this equity by focusing on mezzanine debt. Of the remaining $400,000, you could find a lender to add more leverage above the senior debt holder. If they pitch in $200,000 of the remaining $400,000, this would leave you with $200,000 of equity. The mezzanine lender usually provides this financing at a rate of 12-18 percent per year. While the equity holder will earn less each year because of the interest that needs to be paid to the mezzanine lender, their initial investment can be halved, which allows for less risk.

If you want to make a mezzanine investment, you need to find a project or property where the equity holder is searching for a mezzanine lender. Since you are charging an interest rate for your loan, the returns that you obtain can be paid in any way you see fit. The rate of returns will be set in the initial contract with the borrower. You can mandate that the interest payments be made monthly, quarterly, or annually.

What is the Difference Between Senior and Mezzanine Debt?

open house property

The main difference between mezzanine debt and senior debt is that the latter doesn’t include any amount of equity. Senior debt investments usually come with lower returns but also lower risk. While mezzanine debt is lower on the capital stack than preferred equity and common equity, there’s still a considerable amount of risk attached to this form of investment. The main risk difference is in what these loans are backed by. Unlike preferred equity or common equity, there is a kind of collateral available with mezzanine debt and senior debt. However, this type of collateral is very different.

When you make an investment with senior debt, your investment is backed by the actual property you’re investing in, which means that a default on the property would allow you to acquire the property completely as a means of selling it or foreclosing on it. With mezzanine debt, your initial loan is backed solely by the cash flow of the property. Because of the higher risk of this loan type, you will charge the borrower a higher interest rate. With senior debt, the interest rate is close to eight percent. It’s possible for mezzanine debt holders to obtain interest rates of 12-18 percent. The choice that you make depends entirely on what you’re looking for from an investment.

Characteristics of Senior Debt

The main characteristics of senior debt include:

  • Prioritized for repayment in the event of bankruptcy
  • Lower returns
  • Secured by property
  • Lowest risk in capital stack
  • Regular interest payments

Characteristics of Mezzanine Debt

The main characteristics of mezzanine debt include:

  • Potential for high returns
  • Backed by property cash flow
  • Relatively low volatility
  • High-interest rates
  • Regular interest payments
  • Small amount of downside protection
  • Warrants that allow you to purchase equity in the property

How Do I Invest in Mezzanine Debt

dollar bills

When you want to invest in mezzanine debt, there are two primary methods for doing so. You can either negotiate mezzanine debt transaction with a company or invest in a private fund structure that pools investments together for the sole purpose of investing in mezzanine debt. If you’re an individual investor, you should consider the second option. By joining a private-fund structure with many other investors, your risk may be significantly reduced. You may also be able to join the private fund without needing to make a large initial investment.

Mezzanine debt investments that are made directly with the company or company owners typically require that the investors provide a large amount of capital. These direct investments are commonly made via private equity firms, investment banks, or family owners. If you’re a smaller investor, you will likely need to have a relationship with the borrower if you want to be able to invest in mezzanine debt. Otherwise, this type of direct investment is usually reserved for large institutions.

When you want to engage in this type of investment, keep in mind that the negotiation and closing process can take anywhere from a few weeks to a few months. The easiest way to enter the mezzanine debt market is via a private limited partnership, which is usually organized by an asset management firm. They will gather the funds and handle negotiations for obtaining high returns with comparatively lower risk.

Why Your Company Might Choose Mezzanine Financing

blocks of gold

If you or your company is considering investing in mezzanine financing, there are numerous reasons why you might want to do so when compared to the other types of financing in a capital stack. The potential returns are high and may provide you with fantastic dividends. Because of the contractual interest return that you will have made with the borrower, the volatility of this type of investment is typically lower. In most cases, the interest rate that’s negotiated when making a mezzanine debt investment is around 15 percent. You should receive interest payments in cash around once per quarter. If you are looking to take on some risk with your investment portfolio but want some amount of protection with your investment, choosing mezzanine financing as your primary form of investment is a good option for your portfolio.

When you want to get started with a mezzanine debt investment, you should first determine how much capital you’re willing to invest. If you’re investing hundreds of thousands of dollars, you could consider directly negotiating with the owners of the property. In the event that your investment is closer to $5,000-$20,000, it may be better to join a private investment management firm that focuses on mezzanine debt. With this approach, your investment will be pooled with other investments and will be managed directly by the private firm.

*Disclaimer: The statements and opinions expressed in this article are solely those of AB Capital. AB Capital makes no representations, warranties or guaranties as to the accuracy or completeness of any information contained in this article. AB Capital is licensed by the Financial Division of the California Department of Business Oversight as a California finance lender and broker (DBO Lic. No. 60DBO-69427). AB Capital makes money from providing bridge loans. Nothing stated in this article should be interpreted, construed or used as legal, financial, investment or tax planning advice, or a substitute for thorough due diligence and the exercise of sound independent judgment. If you are considering obtaining a bridge loan, it is recommended that you consult with persons that you trust including but not limited to real estate brokers, attorneys, accountants or financial advisors.

A commercial mortgage involves any kind of real estate loan for an income-producing property that’s meant to be used for business purposes. Commercial mortgages can be used to purchase such buildings as hotels, office buildings, and shopping centers. If you require a commercial mortgage for a building that you wish to purchase or invest in, you should think about obtaining assistance from a commercial mortgage broker. These brokers are financial specialists who have the experience and training needed to provide investors and businesses with assistance in securing a standard commercial mortgage loan. Commercial mortgage brokers also provide investors and businesses with advice on which options are right for them, which allows them to make the right decision for their company or investment portfolio.

Mortgage brokers have comprehensive knowledge of the mortgage process, which means that they can help you find the best interest rates and loan terms. Their expertise gives them the ability to understand all of the financial options available to investors and businesses that are looking for a commercial property. The connections that mortgage brokers build should allow for a smooth loan application process. The following provides an in-depth look at why it’s important for investors and businesses to retain the services of a commercial mortgage broker.

Benefits of a Commercial Mortgage for Your Business

When you’re getting ready to expand your business, there are many benefits that can be derived from obtaining a commercial mortgage as opposed to renting office space. For one, purchasing a building outright with the assistance of a commercial mortgage can often times be cheaper than renting. While the upfront spending for the building can be very high with a possible down payment of 10-40 percent, you should be able to save a significant amount of money over the duration of the loan.

When you purchase a property for your business, it’s also possible for you to make money depending on how much of the space you’re using. If you’re only expecting to use around 60 percent of the space in the building, you could rent out the other space to smaller businesses that need office space for their operations. This option isn’t available when you rent a building for your business. Your monthly rent payments would also likely be significantly higher than the monthly payments on your mortgage, which is why renting the property would be more expensive than purchasing it. Along with the standard rental payments, you would likely be tasked with paying for utilities, maintenance costs, insurance, and property taxes.

Another key benefit of obtaining a commercial mortgage is that this type of mortgage assists with the future financing of your company. In the event that the property goes up in price, your business capital will increase as well. As the equity of the building increases, you will be able to use the equity to provide further funding for any growth or expansion that you believe your company is ready for. Keep in mind that the rate of appreciation will vary depending on such factors like interest rates, local supply, inflation rates, and demand conditions. Purchasing a property also comes with substantial tax breaks in the form of deductions for depreciation, expenses that aren’t related to the mortgage, and interest.

More Reasons to Take Out a Commercial Mortgage

Two women sitting at table with documents

There are additional reasons that you might want to take out a commercial mortgage, the primary of which is that it will provide you with the ability to secure land-development ventures as an investor. If you believe that you’ve found a location that would be ideal for land development and would provide high returns, you might want to take out a commercial mortgage to help you pay for the purchase of the land and eventual development of property on that land.

This type of mortgage will also provide you with the ability to add to your buy-to-let portfolio. When you invest in a buy-to-let mortgage, you will be purchasing the property as a building that you will rent out in order to obtain returns on your investment. If you’re not purchasing the property with the intent to live in it, you won’t be able to use a standard mortgage to purchase the property. Keep in mind that most lenders of these mortgages will require a down payment of 20-40 percent, which should help you get a low-interest rate of 2-5 percent.

There are many benefits that come with adding a buy-to-let property to your portfolio. For instance, this type of investment is designed to be used as a long-term investment that will have consistent growth. While real estate prices can fluctuate somewhat, they have been stable over the past decade, which means that the value of your property should continue to grow as you own it. When you rent out a property, you will be able to generate income from your tenants, which should help you make your mortgage payments while also increasing the returns on your investment. Profits can be increased further if you can obtain a low-interest rate on the mortgage. While investing in a buy-to-let property isn’t automatically a perfect investment that will net you a high return, it’s a relatively low-risk investment that will allow you to diversify your portfolio without increasing the risk by a substantial amount.

What Makes a Good Commercial Mortgage Broker?

Once you’ve made the decision to obtain a commercial mortgage for your business or as an investment opportunity, it’s highly recommended that you find a good commercial mortgage broker who will be able to guide you through the process and help you find the ideal mortgage. A good mortgage broker will have great connections and a vast network that they can tap into when helping a client. It’s important to understand that a mortgage broker represents your interests rather than the interests of a lending institution, which means that they will do everything they can to find the best deals for you in a commercial mortgage.

Because of the connections that a good mortgage broker has, the one you choose should be able to provide you with the greatest value in terms of interest rate, repayment amounts, and loan products. In order to maximize your investment or make low monthly payments on the mortgage, it’s important that you find the lowest interest rates that are available. Since mortgage brokers aren’t loyal to a single lending institution, they can look across the entire industry and numerous lenders in order to find the lowest rates.

When you go to meet a mortgage broker who you feel will provide you with exemplary service, it’s recommended that you attend this meeting with a high credit score, which will also help you obtain a low-interest rate when it comes to the commercial mortgage. If your credit score is hovering in the low 600’s or even lower, you will likely need to increase it if you want your application for a commercial mortgage to be improved.

There are several ways that you can effectively improve your credit score. For one, make sure that you start paying all of your bills on time. Once you do, your score should start to increase little by little. Missed payments can lower a person’s credit score significantly, which is why you’ll want to keep any late payments at a minimum. If you have any debts at the moment, you can also work to pay these debts off over time, which will help you increase your current score. Low utilization on your credit card can also keep your credit score high. If your credit card utilization is below 30 percent, your credit score should increase with each passing month.

*Disclaimer: The statements and opinions expressed in this article are solely those of AB Capital. AB Capital makes no representations, warranties or guaranties as to the accuracy or completeness of any information contained in this article. AB Capital is licensed by the Financial Division of the California Department of Business Oversight as a California finance lender and broker (DBO Lic. No. 60DBO-69427). AB Capital makes money from providing bridge loans. Nothing stated in this article should be interpreted, construed or used as legal, financial, investment or tax planning advice, or a substitute for thorough due diligence and the exercise of sound independent judgment. If you are considering obtaining a bridge loan, it is recommended that you consult with persons that you trust including but not limited to real estate brokers, attorneys, accountants or financial advisors.

A private debt fund specializes in the kind of lending activity that’s handled by a variety of entities aside from banks. These funds raise money from investors before lending that money to a wide range of companies. While a private debt fund is mainly used as an alternative to traditional bank lending, it also can provide investors with access to steady returns that occur from having private debt as a separate asset class. This particular form of investment has become increasingly popular since the 2008 financial crisis. In fact, the overall value of these debt funds has almost tripled globally between 2010-2019.

After the Great Recession of 2008, private debt funds grew in popularity because U.S. banks stopped taking on investments that they deemed to be risky. Since smaller companies oftentimes have difficulty obtaining funding for their business, they turned to private investments, which allowed private debt funds to increase significantly in popularity. Private debt currently accounts for a substantial portion of the private investment markets. If you have been searching for new investment opportunities and are interested in private debt funds, this article provides a detailed guide on what private debt funds are and when they can be used with commercial real estate projects.

Who Invests in Private Debt Funds?

man and woman discussing investrments

There are many individuals who find it beneficial to put their money towards a private debt fund. For instance, this form of investment is particularly common among peer-to-peer lenders. Peer-to-peer lending allows individuals who are looking for a loan to borrow money from other individuals. When you start to engage in peer-to-peer lending, this means that you are cutting out the middle man, which is usually a financial institution. While peer-to-peer lending has a high amount of risk to it, the loans are usually able to provide higher returns because of steep interest rates imposed on the borrower.

Since banks aren’t involved in the process, borrowers have a higher chance of obtaining one of these loans when they have poor credit. Because of this, providing one of these loans to borrowers with poor credit increases the risk that peer-to-peer lenders take on. For the borrower, this lending option provides them with the opportunity to obtain money from several different individuals as opposed to a single financial institution.

Specialized Entities also Invest in Private Debt Funds

Along with peer-to-peer lenders, specialized entities and companies that focus mainly on certain segments of the economy can also invest in a private debt fund. For instance, an investment firm that specializes in real estate investments may handle private debt funds. A private debt fund will usually employ lending teams that have strong and reliable backgrounds in investment banking as well as expert knowledge of the market that they operate in. When an individual investor decides to partner with an investment firm that focuses on real estate, they can be confident that the firm will manage their investments properly.

Private Debt Funds are Different than Investing in Private Debt

Private debt funds are designed to provide and manage portfolio loans rather than invest in private debt. These debt funds don’t invest in any kind of public market, which avoids the unpredictable element of investing in stocks. Instead, these funds can provide and manage an entire portfolio of loans that are made by individual investors. A loan that’s obtained from a private debt fund can be of many different sizes and may be worth millions of dollars. Some firms that manage private debt funds will require individual investors to provide a minimum amount of money before they are able to invest, which could be anything from $1,000 to $1 million.

Strategies for Private Debt Fund Investments

There are many different ways to invest in private debt funding if you’re interested in doing so. The strategy that works for one investor may not match well with the portfolio of another investor. Before you begin investing in private debt, it’s recommended that you study each strategy available to you.

Venture Debt and Private Debt Funds

two women making a plan together on white board

Venture debt financing is provided to companies that already have venture capital backing. The majority of businesses that are able to obtain venture debt financing will have already successfully gone through at least two rounds of equity fundraising with venture capital firms. Instead of being provided with capital, investors are given warrants for common equity because of the high-risk element of this investment. These warrants allow investors to obtain a stake in the company at a later date.

Companies take out these types of loans when they want to reach certain milestones or to acquire sizable assets that are necessary to reach such milestones. When a company gets to this point, it will almost certainly have garnered a certain level of success. In fact, most startups and businesses won’t be provided with venture capital or venture debt unless they have already proven themselves in some way. The main benefit provided to entrepreneurs who decide to take out this type of loan is that it allows them to avoid diluting ownership. Since warrants provide investors with a promise that they can purchase stocks at some point in the future, the company that obtains this loan is able to retain the equity stake of existing investors for the time being.

If you want to take part in venture debt financing, you will likely need to be a part of a venture capital firm, which is easier once you’ve invested as an angel investor. Along with a relatively high-interest rate, the warrants that you obtain from your investment may allow you to eventually obtain a high return on your investment if the stock is worth more when you’re able to purchase it.

Special Situations for Private Debt Fund Investing

helping hands reaching for each other

There are also special situations where someone may be able to invest in a private debt fund. These special situations occur when debt or structured equity investments are made with the goal of obtaining control of a company. This usually occurs when the company is in financial distress. While you might find it to be counterintuitive to invest in a failing company, there are ways to make money with this kind of investment. Investing in a company that’s in financial distress can include trading within the secondary market via distressed debt or direct origination. The secondary market involves making an investment into the stock of a business through a secondary source, which means that the investment isn’t made with the company in question.

Direct origination occurs when loans are made to companies without the involvement of an intermediary. These loans will oftentimes include second liens and credit lines. As for distressed debt, this form of investing involves purchasing securities through a secondary market when the company in question is on the verge of going bankrupt or is performing poorly in general. The investor will purchase bonds that allow them to take control of the company.

If you want to invest your money into a distressed company, your main goal should be to determine if the company can get back on track once you take control. While some investors choose to purchase shares in the troubled company, it may be wiser to invest in the company’s debt. Since you will become a creditor for the company, this gives you the opportunity to direct what happens to the company during liquidation or reorganization.

Investing in Private Debt Funds via Real Estate Debt

White, grey, and red house for sale

Among the more common strategies of investing in private debt is to invest in real estate debt, which typically occurs by direct lending for real estate acquisitions. This money can be lent to existing owners of real estate property as well as prospective buyers who are currently in the market. When you invest in real estate debt, your returns will mainly consist of monthly interest payments that are made against the principal of the loan, which usually allows for steady returns. You will also receive security with this investment via a mortgage, which means that you can take control of the property if the borrower happens to default.

This type of investing is highly popular because it provides borrowers with fast turnarounds where they can purchase the property quickly without needing to go through a lengthy approval process. Banks aren’t involved in this process, which makes it much more straightforward. While it’s possible to invest in residential homes through real estate debt, you can obtain solid returns by investing in commercial real estate. There are also many different types of commercial real estate investments, which should make it easier for you to diversify your portfolio.

Private Debt Funds in Commercial Real Estate

commercial real estate with blue sky in background

Private debt funds are commonly used in commercial real estate to quicken the process of obtaining a loan. When it comes to commercial real estate, the investors who borrow will typically use the loans for bridge loans, rehabilitation loans, redevelopment costs, as well as commercial construction loans. While many borrowers will choose to obtain a loan from a bank, it’s usually faster to apply for a loan directly from a private debt fund because borrowers won’t have to deal with the bureaucracy and lengthy approval process of banks.

*Disclaimer: The statements and opinions expressed in this article are solely those of AB Capital. AB Capital makes no representations, warranties or guaranties as to the accuracy or completeness of any information contained in this article. AB Capital is licensed by the Financial Division of the California Department of Business Oversight as a California finance lender and broker (DBO Lic. No. 60DBO-69427). AB Capital makes money from providing bridge loans. Nothing stated in this article should be interpreted, construed or used as legal, financial, investment or tax planning advice, or a substitute for thorough due diligence and the exercise of sound independent judgment. If you are considering obtaining a bridge loan, it is recommended that you consult with persons that you trust including but not limited to real estate brokers, attorneys, accountants or financial advisors.