For investors seeking real estate exposure without the demands of direct property ownership, two options consistently rise to the top of the conversation: Private Mortgage Investing and Real Estate Investment Trusts (REITs).
Both offer a path to passive income backed by real estate assets, but they are fundamentally different investment structures with distinct risk profiles, return characteristics, and levels of investor control.
This article breaks down how each strategy works, where they diverge, and why private mortgage investing deserves serious consideration from capital investors who prioritize predictable income, capital preservation, and direct asset backing.
How REITs Work
A Real Estate Investment Trust is a publicly traded or privately held company that owns, operates, or finances income-producing real estate. Equity REITs — the most common type — own physical properties such as apartment complexes, office buildings, shopping centers, and hotels. In contrast, mortgage REITs invest in real estate debt rather than physical assets, earning income from the interest on mortgage loans.
REITs are required by law to distribute at least 90% of their taxable income to shareholders as dividends, making them a popular vehicle for income-seeking investors. They are also highly liquid — publicly traded REITs can be bought and sold on major stock exchanges just like any other equity.
On the surface, REITs appear to offer the best of both worlds: real estate income with the convenience of a stock. In practice, however, the picture is more nuanced.
The Hidden Risks of REIT Investing
Despite their popularity, REITs carry a set of risks that are often underappreciated by retail investors.
Market Volatility. Because publicly traded REITs are listed on stock exchanges, their prices are subject to the same sentiment-driven swings that affect all equities. During periods of broader market stress — such as the 2020 pandemic selloff or the 2022 interest rate shock — REIT prices declined sharply, even when the underlying real estate assets retained their value. An investor who needed liquidity during those periods would have been forced to sell at a loss, regardless of the quality of the properties held by the REIT.
Interest Rate Sensitivity. REITs are particularly sensitive to rising interest rates. When rates increase, borrowing costs rise for REIT operators, compressing profit margins. Higher yields on bonds and other fixed-income instruments also make REITs comparatively less attractive to income investors, putting further downward pressure on share prices. The 2022–2023 rate hiking cycle was a stark reminder of this dynamic, with many REIT indices declining 20% to 30% from peak to trough.
Corporate Governance and Management Risk. When you invest in a REIT, you are not investing directly in real estate — you are investing in a company that invests in real estate. Your returns are therefore subject to the quality of management decisions, corporate overhead, fee structures, and the strategic priorities of the REIT’s leadership team. Poor acquisitions, excessive leverage at the corporate level, or misaligned incentives can erode investor returns even when market conditions are favorable.
Lack of Transparency. Large REITs hold dozens or hundreds of properties across multiple markets and asset classes. As an individual investor, you have limited visibility into the specific assets underpinning your investment, the quality of the underlying loans, or the geographic concentration of risk within the portfolio.
What Is Private Mortgage Investing?
Private mortgage investing — also referred to as private lending or hard money lending — involves providing capital directly to real estate borrowers in exchange for a secured promissory note backed by a first or second lien on real property. Rather than owning equity in a property or a company, the private mortgage investor becomes a lender. Their return comes in the form of interest income, and their capital is protected by the collateral value of the underlying real estate.
This structure is most commonly used to fund bridge loans, fix-and-flip projects, construction financing, and other short-term real estate transactions where conventional bank financing is unavailable or too slow. Borrowers pay a premium for the speed, flexibility, and certainty of execution that private lenders provide — and that premium translates directly into higher interest rates and higher yields for investors.
Private mortgage investing can be accessed directly as an individual lender on a specific loan, through a pooled mortgage fund that diversifies capital across multiple loans, or through a mortgage banking company that originates and manages loans on behalf of investors.
How Private Mortgage Investing Compares to REITs
The differences between private mortgage investing and REIT investing become clear when examined across the dimensions that matter most to income-focused investors.
| Equity REIT | Private Mortgage Investing | |
| Asset Backing | Indirect (via corporate equity) | Direct (first or second lien on real property) |
| Market Correlation | High (trades like a stock) | Low (not publicly traded) |
| Income Predictability | Variable (dividends can be cut) | High (contractual interest payments) |
| Typical Yield | 3%–6% dividend yield | 10%–12%+ interest rate |
| Investment Horizon | Open-ended | Short-term (6–24 months) |
| Investor Visibility | Low (large, opaque portfolios) | High (specific collateral, known borrower) |
| Liquidity | High (publicly traded) | Low to moderate |
| Interest Rate Risk | High | Moderate (short duration) |
Asset Backing and Capital Protection. In private mortgage investing, your capital is secured by a recorded lien on a specific piece of real property. If the borrower defaults, the lender has the legal right to foreclose and recover capital from the sale of the asset. The loan-to-value ratio — typically a conservative 50% to 60% in private lending — provides a meaningful equity cushion that protects the lender’s principal even if property values decline. In a REIT, your investment is equity in a corporation, and in a default or restructuring scenario, equity holders are last in line.
Income Predictability. Private mortgage loans carry a fixed interest rate and a defined repayment schedule. The income stream is contractual — not subject to the discretion of a board of directors or the fluctuations of a dividend policy. REIT dividends, while generally consistent, can be reduced or suspended during periods of financial stress, as many investors discovered during the 2008 financial crisis and again in 2020.
Market Correlation. One of the most compelling attributes of private mortgage investing is its low correlation to public equity markets. Because private loans are not traded on exchanges, their value does not fluctuate with investor sentiment, Federal Reserve announcements, or macroeconomic headlines. For capital investors seeking to diversify away from stock market volatility, this is a significant structural advantage.
Investment Horizon and Flexibility. Most private bridge loans have terms of 6 to 24 months. This short duration means that capital is recycled relatively quickly, allowing investors to redeploy funds into new opportunities as market conditions evolve. It also limits exposure to long-term interest rate risk, since loans reprice with each new origination rather than being locked into a fixed rate for 10 or 30 years.
The Trade-Off: Liquidity and Access
Private mortgage investing is not without its trade-offs. The most significant is liquidity. Unlike publicly traded REITs, private mortgage investments cannot be sold on an exchange. Once capital is committed to a loan, it is generally locked in until the loan matures or is repaid. Investors must be comfortable with that illiquidity and should only commit capital they will not need access to during the loan term.
Access is also a consideration. Direct private lending requires either significant capital to participate in individual loans or a relationship with a mortgage fund or lending platform that pools investor capital. The due diligence required to evaluate individual loans — including property appraisals, title searches, and borrower underwriting — is more involved than purchasing shares of a publicly traded REIT through a brokerage account.
For capital investors willing to accept these constraints, the trade-off is compelling: higher yields, direct asset backing, contractual income, and low correlation to public markets.
Which Strategy Is Right for You?
The answer depends on your investment objectives, time horizon, and tolerance for illiquidity.
REITs are well suited for investors who prioritize liquidity and simplicity, are comfortable with stock market volatility, and are seeking broad real estate exposure with minimal due diligence. They are a reasonable component of a diversified portfolio, particularly for investors who are just beginning to build real estate exposure.
Private mortgage investing is better suited for investors who prioritize income predictability and capital preservation, want direct visibility into the assets backing their investment, are comfortable with a defined short-term lock-up period, and are seeking yields that meaningfully exceed what publicly traded income vehicles can offer.
For many investors, the two strategies are not mutually exclusive. A portfolio that combines the liquidity of REITs with the higher yields and lower market correlation of private mortgage investments may offer a more balanced approach to real estate income than either strategy alone.
Discover the Stability of Asset-Backed Lending
At Myers Investment Group, we specialize in originating and managing short-term private mortgage loans secured by real property across Hawaii and the continental United States. Our investors benefit from direct asset backing, contractual interest income, and the oversight of an experienced lending team with over 25 years of real estate finance expertise.
If you are exploring private mortgage investing as a complement or alternative to your current real estate income strategy, we would welcome the opportunity to discuss how it may fit your portfolio.
Contact us to learn more about private mortgage investing with Myers Investment Group.
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