Education: Weighing up the risks of private real estate debt

Where does private real estate debt sit on the risk spectrum?

All investments carry some degree of risk. Generally speaking, the higher the return, the higher the risk. So, where does private real estate debt sit on the spectrum? To understand this, let’s look at some of the different types of risks associated with this investment. 

 

Some of the common risks of real estate debt investing

Here are some of the risks to consider before making an investment

RiskInvestment Consideration
Borrower Risk:
The borrower doesn’t meet their payment obligations or the terms of the loan.
It’s important to understand what experience the borrower has in property development and their track record as these will offer insight into their ability to perform.
Documentation Risk:
Documents are inaccurate or incomplete.
Ensure all transaction documents are professionally prepared and tightly drafted, including key loan covenants.
Property Market:
The property securing the loan declines in value, which increases the loan to value ratio (LVR).
Look for investments with a lower LVR and shorter loan term to minimise the risks associated with property market movements.
Valuation Risk:
The valuer incorrectly values the security property.
In addition to the valuation report it’s important to conduct independent research to validate the report’s findings.
Enforcement Risk:
If the security property needs to be sold, the cost of enforcing recovery action may be substantial.
Ensure your investment is managed by an experienced team with the ability and experience to enforce loan recovery.
Liquidity risk: Non-bank mortgage loans are not listed on any exchange and are generally not redeemable, so investors may not be able to get access to funds from their investment when they need it.Make sure that you understand the investment term offered and are comfortable to tie up your capital for this period.

 

The upside to the downside

Private real estate debt has some key features that make it attractive relative to other asset classes. Firstly, private real estate debt is secured against property, which provides tangible asset backing for the investor.

Secondly, if a loan defaults and the security property needs to be sold, the investor holding the 1st mortgage security ranks in priority to other creditors.

Thirdly, the performance of the transaction is linked to a specific borrower and specific security. This means it’s less likely to be affected by external factors that may cause volatility in other asset classes, such as equities.

Finally, the income payable is set at a fixed level, because it is linked to the monthly interest borrowers pay on the loan. This should provide predictability as to what you can expect to receive on a monthly basis.

 

Is private real estate debt right for you?

If you’re a wholesale investor looking for access to 1st mortgage-backed real-estate opportunities, the AltX platform offers a range of deals for you to consider. To learn more about real estate debt and how to unlock alternative investment opportunities with AltX, visit www.altx.com.au/investments

 

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