Private Credit Real Estate: How Debt Investing Works

Lender, not owner

What is private credit real estate?

Private credit real estate is lending against property instead of owning it. Investors fund loans secured by real estate and earn the interest the borrower agreed to pay. The loans range from short-term senior bridge loans on buildings being repositioned to mezzanine loans and preferred equity behind a first mortgage. Your return is capped at that interest, and your protection is your place in line to be repaid.

"There's also debt opportunities where you can invest your money like the bank and be a first position lien holder."

Mor Milo, Relli co-founder and CEO, in How to Access Private Real Estate Deals Without Being Rich (June 24, 2026)

What are secured debt investments in real estate?

A secured debt investment in real estate is a loan backed by collateral the lender can take if the borrower stops paying. What secures it depends on the layer:

• A first mortgage is secured by a recorded lien on the property itself.
• A mezzanine loan is secured by a pledge of the borrower's ownership interest in the company that owns the property.
• Preferred equity is not a loan, so nothing secures it; it relies on rights written into the company's operating agreement.

Secured does not mean safe. Collateral protects a lender only if it is worth more than what is owed when the lender needs it.

The capital stack

Where does each type of real estate debt sit in the capital stack?

The capital stack is the order in which a property's investors get paid, from senior debt first to common equity last. Mezzanine debt and then preferred equity sit in between. Losses run from the bottom up, so every layer below yours is your cushion. The glossary of private real estate terms defines each layer, along with loan-to-value (LTV) and debt service coverage ratio (DSCR).

The Secured Overnight Financing Rate (SOFR) was 3.87% on October 19, 2026. The average commercial real estate collateralized loan obligation (CRE CLO) loan margin so far in 2026 is SOFR plus 2.90 percentage points. A bridge loan priced at that margin carries a coupon of about 6.8%.

Permanent loans closed by CBRE averaged 5.7% in the second quarter of 2026. Their loan-to-value was 59.6% for commercial property and 63.3% for apartments. Mezzanine and preferred equity figures are practitioner estimates; any deal can price outside them.

Mezz vs pref

What is mezzanine debt in real estate?

Mezzanine debt in real estate is a loan behind the first mortgage, secured by a pledge of equity in the company that owns the property. It is not secured by the property itself.

If the borrower defaults, the mezzanine lender can foreclose on that ownership interest through a Uniform Commercial Code (UCC) sale. A UCC sale is typically faster than a mortgage foreclosure. The lender then takes control of the owning company, subject to the first mortgage.

What is the difference between preferred equity and mezzanine debt?

Preferred equity is an ownership stake paid a fixed return before common equity, while mezzanine debt is a loan backed by a pledge. The difference matters most when a deal goes wrong. The mezzanine lender can foreclose on its pledge. The preferred equity investor relies on contract remedies in the operating agreement, which are typically slower to enforce.

Practitioner guides (PeerSense, 2026) say preferred equity usually costs the borrower more than mezzanine for that reason. Fannie Mae's guide, effective June 2, 2026, allows mezzanine loans behind its apartment mortgages only in narrow cases. That is why those guides call preferred equity the more common middle layer on agency-financed apartments.

Preferred equity is also different from a preferred return, which is a profit hurdle inside an ordinary equity deal. The guide to the preferred return, which is not preferred equity, explains how that hurdle works.

Inside a debt fund

How do real estate debt funds work?

A real estate debt fund pools investors' money, lends it to property owners and passes the interest through to investors after fees. Closed-end funds raise money once and return it as loans are repaid.

Evergreen and interval funds keep taking money and offer to buy back shares at set times. Under SEC Rule 23c-3, an interval fund offers every 3, 6 or 12 months to repurchase 5% to 25% of its shares.

Some funds also hold commercial mortgage-backed securities (CMBS) or CRE CLO bonds, both backed by pools of commercial real estate loans.

Real estate credit funds generate income from contractual interest, fixed or floating at SOFR plus a spread. They also earn origination or exit fees that borrowers pay, with little upside beyond that. The Redwood Private Real Estate Debt Fund's semiannual report to the SEC warns that its "ability to fully collect on the investment in the event of a default, is not guaranteed."

Do private credit funds use leverage?

Leverage shows up in a private credit fund in two places, and the offering documents should explain both. The first is the borrower's: the loan-to-value of each loan. That averaged 67.6% on CRE CLO bridge loans so far in 2026 (CRE Finance Council, CREFC).

The second is the fund's own borrowing against its loans. A fund's lender is repaid before the fund's investors, so fund-level debt adds a layer ahead of you. Ask for the fund's debt as a share of its assets.

Who loses first

Is private real estate debt safer than equity?

Private real estate debt is usually lower risk than equity in the same property, because the lender is repaid first. The lender loses money only after the equity below it is gone. In exchange, the lender gives up the upside, and being senior does not mean you cannot lose money.

2026 risk check

Is private credit safe in 2026?

Private credit is not safe in any form, and 2026 data show where the strain is:

• CMBS loans 30 or more days delinquent reached 8.02% in September 2026, with office at 12.16% and multifamily at 8.04%. Special servicing hit about 11.5%, the highest since 2013 (Trepp). Trepp counts matured loans that did not pay off. The Mortgage Bankers Association (MBA) put bank and thrift delinquency at 1.2% in the second quarter.
• About $875 billion of commercial and multifamily mortgages, 17% of $5.0 trillion outstanding, matures in 2026, and $652 billion in 2027 (MBA). The Federal Reserve said in May 2026 that "vulnerabilities due to upcoming refinancing needs remained."
• The Financial Stability Board reported in May 2026 that some private credit funds received redemption requests above their limits, often 5% of net asset value. It also flagged a liquidity mismatch in semi-liquid funds.
• Lenders are earning less for the same position as banks return. CRE CLO bridge margins averaged SOFR plus 290 basis points so far in 2026, against 329 a year earlier (CREFC). Banks also reported easier commercial real estate lending standards in the Fed's July 2026 survey.
• Floating-rate borrowers are squeezed when SOFR rises, and fixed-rate notes lose value when rates rise.

Ask how a manager's loans performed from 2023 to 2026, not just what they yield. The guide to real estate syndication risks covers what investors can do when a deal fails.

Taxes on interest

Is interest from private lending considered passive income?

Interest from private lending is generally portfolio income, not passive income, under the IRS passive activity rules. IRS Publication 925 lists "interest, dividends, annuities, and royalties not derived in the ordinary course of a trade or business" as portfolio income.

Passive activity income does not include portfolio income. Passive losses can offset only passive income. So losses passed through from a real estate syndication generally cannot shelter the interest from a loan or debt fund.

The form you receive depends on the vehicle. A debt fund organized as a partnership reports your share on a Schedule K-1. A real estate investment trust (REIT), including a mortgage REIT, sends a Form 1099-DIV. The guide to how interest is taxed vs K-1 income covers the forms. This is general information, not tax advice.

Lending routes

How do you invest in private real estate credit?

Investors reach private real estate credit through five main routes, which differ most in who can invest and how you get money back:

• Private debt funds sold under Regulation D, usually to accredited investors, with terms or redemption windows set in the documents.
• Interval funds registered with the SEC, which repurchase a set share of their shares at set intervals.
• Listed mortgage REITs, which trade daily but are sensitive to interest rates, according to the SEC's investor bulletin on listed REITs.
• Short-term notes and loan shares on online platforms. The guide to short-term real estate debt platforms compares them, and the Yieldstreet guide covers Yieldstreet's debt products.
• Mezzanine or preferred equity pieces of a single deal, offered by its sponsor.

Large investors have moved this way too, as Mor Milo noted early in 2026:

"But we're also seeing with the institutions that they're shifting their energy from some of the more traditional equity investments that they make to preferred equity positions, to debt positions, to first position liens."

Mor Milo, Relli co-founder and CEO, in LendAPI Partner Podcast with Mor Milo CEO at Relli (February 26, 2026)

Ask the manager

What should you ask a real estate debt fund manager?

A good real estate debt fund manager answers these six questions in writing before you invest: