Passive vs. Construction Investments – What Investors Need to Know
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In the world of real estate investing, private debt has emerged as an attractive asset class for those seeking stable returns and tangible security. But within this realm, there’s often debate about passive vs. construction investments. As an investor, you might wonder: What’s the difference, and does it matter?
Let’s dive into these concepts, with a particular focus on how Bowery Capital approaches these investment types to help investors make informed decisions.
Understanding Private Debt in Real Estate
Before we explore passive and construction investments, it’s essential to understand the broader context of private credit (private debt) in real estate. If you need a refresher, check out our guide: What is Private Debt? for an in-depth look at its benefits and how it fits into your investment portfolio.
Passive vs. Construction Investments: An Overview
Passive Investments: The Simpler Route
Passive real estate investments are the more straightforward option in private debt investing. These loans are secured by an existing property, with no planned construction or major development.
Key Features of Passive Investments:
- Higher Loan-to-Value Ratios (LVRs) – Because the property already exists, LVRs are often slightly higher.
- Lower Interest Rates – Reduced complexity leads to more favorable terms for investors.
- Straightforward Risk Assessment – The security is the existing property, making it easier to evaluate.
- Clear Exit Strategy – If needed, the property can be sold to recoup the investment.
Example: A land settlement loan where a borrower secures a property for future development but is not funding construction.
Construction Investments: The Complex Cousin
Unlike passive investments, construction investments fund new developments or major renovations. They are inherently more complex due to the nature of construction projects.
Key Features of Construction Investments:
- “As If Complete” Valuation – Loans are based on projected, rather than existing, property value.
- Staged Funding Releases – Funds are disbursed as milestones in the project are met.
- Higher Risk, Higher Reward – Greater potential for returns, but also increased uncertainty.
- Stringent Borrower Qualifications – Borrowers must have a proven track record in construction projects.
Example: A developer securing funding for a high-rise apartment complex, requiring careful market analysis and financial planning.
| Feature | Passive Investments | Construction Investments |
|---|---|---|
| Risk Level | Lower | Higher |
| Interest Rates | Lower | Higher |
| Loan Disbursement | Lump Sum | Staged Releases |
| Valuation Basis | Existing Property | Future Completed Property |
| Complexity | Simple | Complex |
| Exit Strategy | Sell Property | Project Completion |
How Bowery Capital Normalises Risk Across Investment Types
At Bowery Capital, we take a unique approach to risk management to provide consistent investment opportunities.
Risk Normalisation Strategies:
- Adjusting Loan-to-Value Ratios (LVRs) – Lower LVRs for construction investments to offset risk.
- Stringent Borrower Qualification Standards – Ensuring only experienced developers receive funding.
- Pre-Sales Requirement for Construction Projects – Securing buyers before project completion.
- Incorporating Contingency Funding – Preparing for unexpected costs in construction investments.
- Securing Additional Collateral – Adding extra layers of financial security when needed.
By using these strategies, we minimise risk and stabilise returns for our investors across both passive and construction investments.
Consistent Returns: The Bowery Capital Advantage
Rather than fluctuating returns between 6% and 12%, we aim for a steady range of 9.25% to 10.25%. This consistency allows investors to plan with confidence, knowing that their private debt investments are optimised for long-term growth.
Making an Informed Decision as an Investor
Before choosing between passive vs. construction investments, consider:
- Your risk tolerance – Are you comfortable with higher risk for potentially higher returns?
- Due diligence – Understanding the investment type and risk mitigation strategies in place.
- Choosing the right investment manager – Working with a proven, strategic investment firm like Bowery Capital.
The Bottom Line: It’s About the Investment Strategy
While passive vs. construction investments have distinct differences, with Bowery Capital’s expertise, the investment type becomes less critical than the overall strategy and risk management.
With our proven methods, we ensure investors receive steady, reliable returns—whether in a passive loan or a complex construction project.
Want to Learn More?
Interested in real estate private debt investments? Contact Bowery Capital today to discover how we can help you achieve your financial goals!
