With the exciting performance of the stock market in 2019, it’s easy to overlook the real estate bond market. But real estate is a solid asset class that offers diversification to an investment portfolio.


Many understand the desirability of investing in real estate, through beneficial ownership of rental properties or real estate investment trusts. Real estate bonds combine real estate investment with fixed income and offer investors the opportunity for passive income and capital growth.

The properties of real estate bonds apply to investing in real estate debt. Real estate bonds are fixed income investments or loans, backed by real estate. This means that investors in real estate bonds and other types of real estate bonds can expect cash flow from the underlying mortgage payments. These passive income opportunities come in many varieties with varying degrees of credit worthiness.

The myriad ways to invest in real estate debt include mutual funds, real estate investment trusts or REITs, exchange traded funds and real estate crowdfunding platforms. In addition, real estate bonds can be secured by real estate mortgages, commercial mortgages or other real estate debts.

Here are four ways to invest with these types of bonds:

  • Government real estate bonds.
  • Commercial real estate debt fund.
  • Mortgage REITs.
  • Crowdfunding of real estate bonds.

Government real estate bonds

The safest real estate bonds are agency residential mortgage-backed securities, says Mayra Rodriguez Valladares, managing partner at MRV Associates in New York. These real estate bonds are backed by Freddie Mac and Fannie Mae.

Freddie Mac and Fannie Mae buy prime mortgages from banks and bundle them into a security or bond.

“Because these government-sponsored companies back the bonds, they are the safest securitizations for investors,” Rodriguez said.

Investors can buy these government bonds through mutual funds or ETFs such as the Vanguard GNMA Fund (ticker: VFIIX). The fund offers a return of 2.8%, has an annual 10-year return of 3.2% and charges a management fee of 0.21%.

Commercial real estate debt fund

For investors seeking equity-like returns with comparable bond volatility, senior secured commercial real estate debt funds are an alternative.

Evan Gentry, founder and CEO of M360 Advisors in Ladera Ranch, Calif., Says commercial real estate debt funds can serve as defensive investments, with attractive returns in today’s market environment. Yield and regular distributions provide liquidity to income-seeking investors.

Commercial mortgage backed securities can come from sources as diverse as hotels, apartments, warehouses, agricultural facilities, shopping malls and casinos. These loans are grouped according to the risk level of the underlying securities.

Rating agencies assign ratings from AAA to unrated, Rodriguez says. As a result, lower rated real estate bond funds will offer higher returns, but with greater risk of default.

The iShares CMBS ETF (CMBS) tracks an index of high-quality commercial mortgage-backed securities with an expected maturity of at least one year. Debt is backed by income-producing properties such as shopping malls and hotels. The five-year average return is 3.1% and is currently earning 2.6%. The ETF charges a reasonable expense ratio of 0.25%.

Gentry encourages investors in commercial real estate debt funds to review the managers to ensure that the management of the fund is experienced in handling various market conditions and in overseeing these types of investments.

Mortgage REITs

Mortgage REITs, or mREITs, finance income-producing real estate by buying or creating mortgages. Investors earn interest and capital on these investments.

These real estate bond investments provide significant liquidity to the real estate market and invest in residential and commercial mortgages as well as residential mortgage-backed securities and commercial mortgage-backed securities.

Mortgage REITs can focus on residential or commercial mortgages, and sometimes both. Investors will find opportunities to invest in mortgage REITs in mutual funds and ETFs.

New Residential Investment Corp. (NRZ) is a REIT that focuses on the investment and management of assets related to residential mortgages. NRZ’s investments include real estate titles, residential mortgages, consumer loans including unsecured loans and homeowner loans. NRZ and offers a yield of approximately 13%. Shares are volatile with a 52 week trading range of $ 13.63 to $ 17.47. The 13% return and the wide range of stock prices suggest that investors in NRZ should be prepared for volatility in stock prices, which will impact the total return on the investment.

Crowdfunding of real estate bonds

Real estate crowdfunding has been on fire since the Jumpstart Our Business Startups law was passed in 2012. This legislation relaxes the Securities and Exchange Commission regulations on small businesses and provides better access to crowdfunding.

Real estate crowdfunding pools an individual’s money with others to invest in real estate debt or equity.

Many real estate crowdfunding companies have sprung up, offering both equity and debt financing investment opportunities. Others offer one or the other.

For the most part, investors of all income levels can participate in the real estate bond markets. But some companies are only open to accredited investors.

The difference between REITs and real estate crowdfunding is that with crowdfunding, investors can choose the specific projects in which to invest. REITs are also more liquid than crowdfunded real estate bonds, which can tie up investor money for years.

PeerStreet is a real estate debt crowdfunding site for accredited investors. The company allows investors to create their own portfolio of real estate investments or offers an automated investment option.

For unaccredited investors, Fundrise offers eREITs, which do not trade on an exchange like typical REITs. Fundrise’s investment opportunities include real estate bonds or debt financing.

Louis Wolkenstein, senior director at The Investment Advisor in Pittsburgh, says investors should be aware that investing in mortgage-backed securities may involve early repayment of principal to the bondholder, as mortgage debt under- underlying is refinanced at a lower interest rate and when the loans are repaid. leave early.

He adds that this could reduce the amount of capital invested as part of the money is returned to the investor before maturity. In an environment of falling interest rates, this reduces the total returns on investment in real estate bonds.

As with any investment, investors should understand the credit ratings of the underlying debt and ensure that the risk level of the investment matches theirs.


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