Private Lending vs REITs: Which One Delivers More Reliable Income?

Real estate has long been a favorite for investors who want income, inflation protection, and tangible assets behind their capital. But not everyone wants to buy and manage property directly. Instead, many turn to passive real estate investing through vehicles like Real Estate Investment Trusts (REITs) or private lending funds.

On the surface, both options promise exposure to real estate and regular distributions. Yet under the hood, the mechanics are very different. The question is simple: when it comes to reliability of income, which strategy performs better—private debt vs REITs?

How REITs Generate Income

A REIT is a company that owns, operates, or finances income-producing real estate. Investors buy shares of the REIT, much like buying stocks, and in return receive dividends. U.S. law requires REITs to distribute at least 90% of taxable income as dividends, which is why they’ve become a popular source of income for individuals and institutions alike.

For investors, REITs offer:

• Exposure to diversified property portfolios (commercial, residential, industrial, retail)
• Liquidity—shares are often traded on public exchanges
• Dividend yields that historically range between 3% and 6%

The key point is that REIT income is tied to property cash flows, market valuations, and ultimately, the broader economy. When tenants pay rent consistently, REITs distribute steady dividends. When vacancies rise or property values fall, income distributions often shrink.

How Private Lending Generates Income

Private lending, by contrast, is not about owning or operating property. Instead, it’s about financing property. Investors pool capital through a private credit fund, which then originates short-term, collateral-backed loans to real estate borrowers.

Here’s what sets private lending apart:

• Investors earn income from interest payments on loans, not property operations.
• Loans are secured by real estate collateral, typically at conservative loan-to-value (LTV) ratios of 60–65%.
• Funds distribute monthly or quarterly interest to investors, creating predictable cash flow.

This structure decouples investor income from fluctuations in occupancy rates, tenant defaults, or daily market valuations. Instead, returns rely on contractual loan agreements backed by tangible assets.

Comparing Income Reliability

For investors, the central question is reliability: how dependable are the income streams?

REITs:
Dividends fluctuate with operating results. During economic downturns—such as 2008 or the COVID crisis—many REITs slashed or suspended dividends. While long-term performance often recovers, the income stream can be volatile in the short term.

Private Lending:
Income is contractually determined. Borrowers are obligated to make monthly interest payments, regardless of property value swings. While defaults can happen, conservative underwriting and first-lien positions provide strong recovery mechanisms. For investors, this creates smoother, more predictable cash flow.

Verdict: Private lending wins on reliability.

Risk Considerations

No investment is risk-free, so it’s important to weigh the trade-offs.

• Market Risk in REITs: Publicly traded REITs move with the stock market. Even if properties perform well, share prices can swing wildly due to investor sentiment, interest rates, or macro headlines. Private REITs reduce stock market correlation but often come with illiquidity.
• Credit Risk in Private Lending: Borrowers may default. However, loans are secured by collateral, and disciplined funds lend at conservative LTV ratios. In default scenarios, funds have the legal right to foreclose and recover principal.

For investors prioritizing income stability over growth, private lending’s secured structure often feels more aligned.

Liquidity and Access

One of REITs’ biggest advantages is liquidity. Shares can be bought or sold daily on major exchanges. Private lending funds, by contrast, are usually less liquid, with lock-up periods or quarterly redemption windows.

For investors who value flexibility and the ability to reallocate capital quickly, REITs may hold the edge. But for those comfortable with tying up capital for a defined period, the trade-off is higher, more reliable income.

Tax Treatment

Lawyers, doctors, and other high earners often care deeply about tax efficiency.

• REIT Dividends: Generally taxed as ordinary income, though some may qualify for a 20% deduction under Section 199A.
• Private Lending Distributions: Typically treated as interest income. When held in tax-advantaged accounts such as a Self-Directed IRA (SDIRA), private lending income can compound tax-deferred, making it an attractive option for retirement planning.

The right choice depends on personal tax planning, but many high earners favor private lending inside retirement structures for efficiency.

Long-Term Wealth Building

REITs can provide capital appreciation if property values rise over time. Investors who buy and hold may benefit from both dividends and share price growth. Private lending, in contrast, focuses on income and preservation, not appreciation. Capital is protected by collateral, but upside is capped at the agreed interest rate.

For income-focused investors—retirees, professionals seeking passive income, or those nearing financial independence—this trade-off is worth it. For growth-oriented investors, REITs may still play a complementary role.

Who Should Choose What

REITs may fit investors who:

• Want high liquidity and easy access
• Value exposure to property markets and potential appreciation
• Are comfortable with market volatility and dividend fluctuations

Private Lending may fit investors who:

• Value reliable passive income over potential appreciation
• Prefer the security of collateral-backed lending
• Can commit capital for defined periods without daily liquidity
• Want to diversify away from public market volatility

How LBC Capital Income Fund, LLC Structures Income for Investors

At LBC Capital Income Fund, LLC, our focus is on delivering predictable, disciplined income streams for accredited investors. We achieve this through:

• First-lien lending: All loans are secured by real estate collateral.
• Conservative underwriting: Loan-to-value ratios typically 60–65%.
• Monthly distributions: Reliable cash flow for investors seeking passive income.
• Alignment of interests: Our management team invests alongside clients.

By emphasizing protection, discipline, and transparency, we aim to provide the kind of reliability REITs often struggle to match.

Choosing Stability Over Volatility

Both REITs and private lending can play valuable roles in a diversified portfolio. REITs offer liquidity and potential for long-term appreciation but carry income volatility tied to market cycles. Private lending, by contrast, delivers steady, contractually based cash flow backed by collateral, making it particularly attractive for investors who prioritize stability and income.

For accredited investors seeking passive real estate investing without the rollercoaster of public markets, private credit stands out as the strategy that truly delivers more reliable income. When ready to learn more – book the call with our fund manager here.