Private mortgage income funds tend to exhibit income-driven returns rather than being subjected to market fluctuations.
REITs or Real Estate Investment Trusts were created in the United States in 1960 by Dwight D. Eisenhower as an extension of the Cigar Excise Tax.
It paved the way for investors to buy shares in commercial real estate portfolios which were modeled on mutual funds and required the distribution of at least 90% of their taxable income to shareholders.
Tens of billions of dollars are invested in these funds in the US each year.
While precise data is not available, a 2024 estimate suggested somewhere between $60-85 billion poured into these trusts in that year alone.
It amounts to more than three times the money invested into private mortgage income funds.
Yet REITs are subject to equity market volatility and behave in precisely the way that so many serious investors are seeking to avoid.
In 2022, REITs suffered a negative return of 24.9% and while they recovered to add 11.4% in 2023, returns in the last two years of 4.9% and 2.3% have been modest.
Conversely, private mortgage income are not exposed to the same volatile market forces.
They prioritise contractual yield and capital stack protection, resulting in materially different risk-return behavior.
What investors think they are buying with REITs
REITs appeal to a range of investors but especially ones who are income-focused such as retirees, investors seeking diversification and those seeking a hedge against inflation.
Here’s what attracts them:
liquidity
dividend yields
exposure to commercial real estate
equity upside
But here’s the catch – they perform like equities!
Market volatility rose significantly in 2025 with the CBOE Volatility Index (VIX), also known as the fear index, rising above 20 for the third time in six years.
In 2022, the FTSE NAREIT All Equity REIT Index suffered a drawdown of between 20-30%, depending on the sector.
Rate hikes, higher bond yields, rising cap rates and fears of a recession all spooked the market.
When volatility is high, public REIT indices follow similar patterns to the S&P 500, especially during sharp sell-offs.
That’s because investors sell ‘risk assets’ broadly when the red tide rises.
During the COVID crash of February-March 2020, the S&P 500 plummeted around 34%.
The FTSE NAREIT All Equity REIT Index fared even worse, diving around 40% from peak to trough.
The mark-to-market effect
The mark-to-market effect describes how assets are frequently revalued based on current market prices rather than their historic cost.
Public securities, including bonds and REITs, are priced continuously.
While mortgage funds are not entirely immune to changes in the market, they are structured in a very different way.
Public REITS
priced daily
subject to macro sentiment
influenced by interest rate expectations
impacted by equity fund flows
Private mortgage funds
NAV-based
loan-level valuations
not exchange-traded
returns driven largely by contractual interest
There are always elements of risk with any investment.
But the volatility of pubic REITs affects the investor experience in the same way as owning equities.
Private mortgage funds may still be sensitive to rate and credit cycles but are less visibly volatile.
They may be vulnerable to mark-to-market in an economic sense but not in a real-time trading sense.
Equity vs Senior Debt in the Capital Stack
A capital stack is the structural pyramid used to fund a real estate project or company.
It illustrates the order of creditors and hence the level of risk from lowest, at the top of the pyramid, to highest, at the bottom.
There is no better position in a capital stack than that of the senior secured lender at the very top of the pyramid.
In the event of default, the order of payment is as follows:
senior secured lender
mezzanine debt
preferred equity
common equity
The real strength of a mortgage income fund is that by design, it targets senior debt exposure.
Conversely, public REITs only offer equity exposure.
In stress scenarios, equity always absorbs the losses.
Senior debt is protected by the LTV buffer.
Income predictability
Many investors are tempted by public REITs seeking regular income.
Yet they are not as reliable or predictable as mortgage income funds.
That’s because public REIT dividends are:
dependent on operating income
may suffer during downturns
Senior secured loans at the top of a capital stack offer:
contractual interest
defined maturity
a default recovery process
A retiree who invests $1m in a public REIT may expect a yield of between 4-5%.
But the same retiree who invests in a private mortgage income fund yields between 9-11%.
The difference is not arbitrary. It is contractual and due to capital stack positioning.
Correlation and Portfolio Construction
Private mortgage funds historically exhibit a lower correlation to equities than REITs for three main reasons.
More stability via income-based returns from contractural interest payments rather than capital appreciation.
Tangible risk drivers such as LTV, borrower credit quality and property collateral value rather than variables like earnings expectations, growth forecasts and risk appetite.
They are appraisal based resulting in less frequent repricing and lower reported volatility.
Volatility is lower because:
mortgage funds are valued quarterly rather than traded daily
Their mark-to-market is periodic rather than instantaneous
Their return driver is interest income instead of property values and market multiples
Drawdowns are typically smaller and slower rather than dramatic
Hence, private mortgage income funds offer a unique diversification tool because their returns come primarily from income rather than price appreciation.
While the risk of any investment is never zero, they are less exposed to market forces and their performance depends more on credit underwriting rather than macro equity cycles.
The tradeoff
It is important to acknowledge REITs have many advantages:
significant growth potential of property appreciation and rental income
greater transparency
lower minimum investment levels
they can be traded quickly and easily
daily liquidity as opposed to private credit which requires lock-out periods
Private credit returns are subject to underwriting and manager performance.
They expose borrowers to the risk of default, demand higher minimum investments and may be limited to accredited investors.
And their quarterly or model-based pricing results in a valuation lag offering less transparency than REITs.
The opportunity
While no private mortgage income fund index exists to compare them year on year with REITs, evidence from a range of individual funds consistently indicates less volatility, greater certainty and overall better performance.
That is because private mortgage income funds tend to exhibit income-driven returns rather than being subjected to market fluctuations.
But critically, their performance is heavily dependent on credit underwriting, loan structures and interest-rate environments.
Central provides a savvy property investment opportunity.
The Central Mortgage Income Fund (CMIF) is a California-focused private credit fund that originates and acquires real estate-backed loans giving investors consistent, risk-adjusted returns from short-term, senior-secured loans.
Central works by aligning investors with targeted borrowers utilising carefully underwritten short-duration loans with first-position liens and conservative loan-to-value ratios (average 65%).
Get in touch to find out more.
This analysis is based on comprehensive market data and industry research. Past performance does not guarantee future results. Investors should conduct their own due diligence and consult with qualified advisors before making investment decisions.
