Real Estate Debt Investing: The Pros and the Cons

real estate debt investments

real estate debt investments

Many of you know what Real Estate Investing is, but not everyone is aware of what Real Estate Debt Investing is. Real estate debt is a kind of loan in which the borrower is obligated to repay the lender over a specified period. These investors are paid a set rate of return derived from the interest generated on the loan. Commercial real estate is the focus of real estate debt funds. Real Estate debt investing has its advantages and disadvantages. Here’s a look:


According to The Federal Trade Commission Consumer Information, more people are finding themselves holding some form of unsecured debts and struggling to make payments. The advantages of real estate debt investments are becoming more apparent.

Easy to Do

Unlike many other forms of debt, investing in real estate debt is relatively easy to finance with a few simple options available to you. You can still use real estate debt investments through short sales and rehabbing, renting, and flipping even with a rocky financial history.

You will be able to choose between debt consolidation loans. As well as home equity loans and even elect to take out a second mortgage for real estate debt if you want.

Tax Loopholes

One of the significant advantages of real estate debt investing is that you don’t have to pay tax on the profits. In other words, when you invest in real estate, you make money without paying tax. This is also one of the main reasons why people prefer real estate debt investing.

Lower Fees

The second advantage of debt investing is that you can buy property without paying a monthly installment. This means that you can take advantage of low-interest rates. Thus can purchase more properties. The only disadvantage is that if you overpay for your property, you can lose your entire investment. This is not a problem because you will deduct your payment as an expense on your tax return. Also, you may have to pay property taxes annually, depending on where you live.

Uncapped Returns

This kind of investment has a longer time horizon in terms of earning possibilities. Annualized returns may be about 25%. However, since there is no limitation, the sky’s the limit from an investor’s viewpoint. For greater insight, Pacific Private Money has more information on the best way to go forward.


Of the disadvantages, the most glaring ones are:

Higher Risks

One of the most significant disadvantages of this option is the potential risk involved. While equity crowdfunding may put more money in the hands of investors, it also entails accepting more significant risks. Investors are second in line when it comes to getting a return on their investment. If the property fails to meet its performance expectations, it may easily result in a loss.

If you are a beginner, then you may not know when it is just right to quit. There is a danger that you may get so caught in the trap of making a significant investment that you may think you have no choice but to keep going. But you have to keep yourself realistic.

Longer Hold Time

When compared to debt investors, equity investors have a considerably longer time horizon. Hold periods may range from five to 10 years, which is essential to keep in mind if you want to keep your portfolio liquid.

Unfortunately, if you purchase a property, and the property is a dud you will not see your investment income stream for several years as you would if you had chosen to invest in another type of equity investment.

Most banks and other lending institutions frown on unsecured debt investments. Mainly because they are seen as high-risk investments, this type of debt typically doesn’t come with a long hold period, limiting the number of times you can make a new loan.

Closing Thoughts

There are many different types of real estate debt investments. But the one concept that has consistently brought in investors regardless of the market is the concept of “Loan Origination.” This is where the lending party, a private individual or institution, lends a specific amount of money to the real estate debt investor. While you can make many different loans in this manner, many investors and companies have found it to be a very effective means of growing their business with little need for credit or collateral.

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