Demystifying real estate credit funds for a steady investment option
When it comes to investing, there is a wide range of options available – each with its own set of benefits and risks. One such option gaining popularity among investors is real estate credit funds. If you are unfamiliar with these types of investments, read below.
What are Real Estate Credit Funds?
At its core, a real estate credit fund is a type of investment where investors pool their money together in a fund, which then provides loans to real estate projects. These loans are secured against the property – meaning if something goes wrong, the property can be sold to recover the investment.
Unlike listed investments, such as stocks or real estate investment trusts (REITs), real estate credit funds are generally not traded on the stock market. This means they do not experience the daily price fluctuations that come with being listed on an exchange.
Liquidity and Volatility
One of the key differences between listed and unlisted investments is liquidity – the ease with which an investment can be converted into cash. Listed investments are highly liquid, meaning they can be sold quickly; often within a few days. However, this liquidity comes with a downside: volatility. Because listed investments are traded on the stock market, their prices can be volatile, meaning their value moves up or down based on market sentiment, economic news, and other factors. This volatility can be particularly concerning for investors looking to preserve their capital, especially in the short term.
Being unlisted, real estate credit funds are less liquid and it can take months, or even longer, to convert your investment into cash. However, this lack of liquidity has a significant advantage: it reduces volatility. Since these funds are not traded on the stock market, they are not subject to the same daily price swings. This makes them a more stable investment option, particularly for those looking to preserve capital over the long term.
The Liquidity Premium – What is it?
The concept of a ‘liquidity premium’ is an important factor when considering an investment in real estate credit funds. Essentially, because investors in unlisted funds are willing to accept less liquidity (the ability to quickly access their money), they are often compensated with higher returns. This is known as the liquidity premium.
In practical terms, this means that real estate credit funds typically offer higher returns when compared to more liquid investments, like bonds or stocks. The trade-off, of course, is that you need to be comfortable with the idea that your money might be tied up for a longer period.
Capital Preservation
For many investors nearing retirement, capital preservation is a high priority. Real estate credit funds can be an attractive option in this regard. Because these funds are secured by real estate, they offer a layer of protection for your capital. In the event that the borrower is unable to repay the loan, the property can be sold to recover the investment.
Moreover, the reduced volatility of these funds further helps in preserving capital. This capital stability combined with higher income returns can be attractive for investors in the retirement phase of their life.
Conclusion
Real estate credit funds offer a compelling investment opportunity for investors seeking higher income returns combined with capital stability. While they may not provide the same level of liquidity as other investments, the trade-off is a more stable and secure option that can help preserve capital over the long term. At Capital Property Funds, we’re committed to helping our investors navigate these opportunities, offering expertly managed funds that align with their financial goals.
If you’re interested in learning more about how real estate credit funds can fit into your investment portfolio, talk to our team on (02) 8004 6218.
About Capital Property Funds
At Capital Property Funds, we specialise in offering Real Estate Credit Funds that provide our investors with access to stable, income-generating real estate loans. Our funds are designed with the needs of our investors in mind, focusing on capital preservation and delivering consistent income returns. By pooling resources from multiple investors, we’re able to offer larger loans to high-quality real estate projects, providing a level of diversification and risk management that individual investors may find difficult to achieve.
Our Real Estate Credit Funds are an excellent option for those looking to earn higher returns while maintaining a focus on capital preservation. We carefully select the projects we invest in, ensuring that each loan is secured by valuable real estate assets.
If you’re interested in learning more about how real estate credit funds can fit into your investment portfolio, talk to our team on (02) 8004 6218.
Disclaimer: Past performance is not indicative of future performance. The distributions and investment returns depend on the performance of the underlying investments. Information contained within this article does not constitute financial advice, nor is it a personal recommendation. Capital Property Funds is not authorised or qualified to provide financial advice or to make an investment recommendation. Information contained within this article is general in nature and has been prepared without regard to the individual objectives, financial situation, or requirements of any person. Prospective investors should seek personal financial and legal advice before deciding to invest.
