This guide covers key insights on investing in real estate debt funds, including benefits, risks, and due diligence strategies.
Private and institutional investors increasingly turn to real estate debt funds as an alternative to direct real estate ownership.
Real estate debt funds work by pooling investor capital and, depending on the fund’s investment strategy, deploying it in one of two ways:
The ideal debt fund for you depends on your risk tolerance and financial goals. For conservative investors seeking regular distributions — and who aren’t too worried about maximizing returns — funds focused on originating commercial loans is a good option. These funds can pay investors monthly by lending to creditworthy borrowers with strong repayment histories.
On the other hand, investors focused on maximizing returns — rather than steady income — are increasingly gravitating toward NPL funds.
To illustrate the potential returns of NPLs, Constitution Lending’s Credit Fund achieved a net return of 56.96% in 2024.
Below, we discuss the benefits of investing in performing and NPL funds, risks to consider and how to mitigate them, and due diligence strategies to help you choose the correct fund.
Throughout the article, we touch on how you can invest in the loans we originate for as little as $1,000 and capitalize on 10% to 14% annualized returns.
We also review our NPL fund, highlighting the strategy behind its 56.96% net return in 2024 and how we make NPL investing accessible with a $20K minimum — far below the $250k to $1MM minimum typical of most funds.
If you’re interested in maximizing returns and want to learn more about NPL funds, feel free to skip to this section.
Unlike equity investments, where returns depend on market conditions and asset appreciation, real estate debt funds prioritize capital protection by holding first-lien positions on secured assets. This means that fund managers can take control of and sell the underlying property to recover any losses if borrowers cannot pay.
Additionally, real estate debt comes with a defined order of repayment. If the property is sold, debt investors typically have priority over equity investors. Borrowers only get paid after fund investors have recovered their entire investment. You don’t get this type of downside protection with private equity.
However, as we touched on above, these scenarios are rare if you invest with a well-managed fund that issues loans to borrowers with good credit scores and long repayment histories.
Depending on the type of loans a real estate debt fund originates (e.g., bridge loans, fix-and-flip loans, owner-occupied loans, mezzanine loans, etc.), interest rates can range from 7% to 14%.
Constitution Lending primarily originates short-term, commercial loans like fix-and-flip, bridge, and construction loans, enabling us to achieve higher returns than most funds focused on origination, typically between 10% to 14%.
In addition, real estate debt fund returns are less correlated to stock market fluctuations because of their reliance on contractual interest payments and collateral-backed structures rather than market sentiment. This provides a hedge against volatility. If capital markets experience a downturn, real estate debt can still generate stable returns.
Many real estate debt opportunities require millions in capital and real estate lending expertise. However, a debt fund allows investors to participate in professionally managed loan portfolios without having to underwrite or service loans themselves.
While most funds have $250K+ investment requirements, Constitution Lending provides access starting at $1,000 for performing loans.
Read more: How to Buy Mortgage Notes with as Little as $1,000
A non-performing loan or NPL is any loan where a borrower has defaulted. An NPL fund pools investor capital, uses it to purchase NPLs, and resolves the unpaid senior debt.
Fund managers can purchase NPLs from banks for less than the borrower’s outstanding balance. Investors in an NPL fund earn returns when fund managers accelerate the loan, mandating the borrower sell the property and use the proceeds to pay the outstanding loan balance.
The return is the difference between the NPL purchase price and total loan balance.
The reason NPL funds can purchase NPLs at discounts is because distressed loan markets and commercial mortgage-backed securities (CMBS) are often inefficient, with banks eager to offload NPLs to free up capital. This creates investment opportunities for specialized funds to acquire assets at attractive prices and use their debt resolution expertise to resolve the debt.
Another route that fund managers use to generate high returns is the default interest rate, which is the interest rate borrowers pay after defaulting and is higher than the standard interest rate.
For example, most NPLs in our fund have default interest rates of around 18% to 24%.
The default interest rate is added to the outstanding loan balance as fund managers work toward debt resolution, eroding the borrower’s equity. Debt fund managers and investors receive payment for the default interest rate when the property is sold and used to repay the full loan balance.
Here’s an example to help you understand the power of default interest:
Many investors perceive NPLs as risky. However, a well-managed fund focused on low LTV loans can provide a comparable — or even greater — level of safety than performing loans.
LTV stands for loan-to-value and is a ratio used by private lenders to compare the outstanding loan balance with the value of the property. For example, if a multifamily home is worth $1MM and the loan balance is $600K, the LTV is 60% — the borrower has 40% equity in the property.
Constitution Lending typically acquire real estate loans at 60% LTV or lower, creating three key advantages:
During economic downturns, default rates tend to rise, leading to an increased supply of NPLs. While many investment classes suffer during downturns, NPL funds can benefit from these market conditions by acquiring distressed debt at even greater discounts.
By investing in an NPL fund, investors gain access to a niche but lucrative segment of the real estate market. With proper asset management and an experienced fund operator, NPLs can offer a compelling mix of downside protection and strong return potential.
NPL funds can generate returns through various strategies, such as negotiating loan modifications with borrowers, selling reperforming loans, or foreclosing and selling the underlying real estate asset.
This flexibility enables fund managers to adjust their debt strategies based on market conditions.
When investors purchase NPLs from banks, they need at least $2MM.
Many NPL debt funds try to lower the starting investment to $250K to $1MM, but this amount of capital is still out of reach for many investors.
With Constitution Lending’s NPL fund, you can invest with as little as $20K.
This is why it’s so important to invest with an NPL debt fund like Constitution Lending, which exclusively purchases NPLs with an LTV below 60%, as it reduces the likelihood of loans becoming underwater.
Most real estate credit funds have a minimum investment amount of $250K to $1MM, depending on their structure, target investors, and underlying asset class.
However, Constitution Lending aims to make private real estate debt investing more accessible. You can start investing with $1,000 in our performing loans and $20K in our NPL fund.
Most real estate debt funds have lock-up periods, specified timeframes where investors are restricted from withdrawing their capital.
Lock-up periods protect fund investors and managers by preventing large-scale withdrawals, which can disrupt a fund's investment strategy given the illiquid nature of commercial real estate debt (CRE). Fund managers may face challenges quickly liquidating their debt positions to meet high withdrawal demands.
Constitution Lending has a lock-up period of 6 to 18 months for performing loans and 18 months for our NPL fund.
Returns are distributed to investors at specific time intervals.
Because Constitution Lending receives monthly interest payments from borrowers on our performing loans, we can pay investors monthly.
NPL funds generate returns when the borrower pays the full loan balance. Because the timeframe for debt resolution can vary significantly from loan to loan, NPL funds rarely distribute earnings monthly. NPLs generate higher returns than performing loans, but distributions are less regular.
When you invest in our NPL fund, you receive quarterly distributions after the 18-month lock-up period.
Schedule a call with one of our portfolio managers to start investing in our NPL fund.
Alternatively, you can invest in the commercial loans we originate by creating an investor’s account.
| Qualification | Requirement |
|---|---|
| Minimum and maximum loan amount | $150,000 to $3,000,000 |
| Type of property | Non-owner occupied single-family, multi-family, and 5-8 unit properties |