Insights
Income allocation is an essential component of every balanced and diversified investment portfolio.
Income allocation is an essential component of every balanced and diversified investment portfolio.
Sophisticated investors assess investments based around the function they perform within their portfolio.
An investor can have substantial wealth across equities, bonds, real estate and cash yet have relatively little exposure to income generated by lending directly against real assets.
Real estate private credit offers a distinct combination of contractual lending income, property-backed security and professionally-managed exposure.
But investors must assess those characteristics against credit risk, illiquidity and concentration.
For high net-worth individuals and family offices, this raises a question about portfolio composition rather than simply another search for higher returns.
The question to ask is not, “Can this investment generate 8%?” but “What role would this exposure serve within my portfolio and what risks am I undertaking to obtain that income?”
The underutilization of real estate private credit
Goldman Sachs surveyed 245 family office decision makers globally in 2025, revealing only 4% of average portfolio allocations were directed towards real estate private credit.
That was an increase from just 3% in 2023.
Those findings were:
Public equities – 31%
Private equity – 21%
Cash, excluding US Treasuries – 12%
Private real estate and infrastructure – 11%
Fixed income – 11%
Hedge funds – 6%
Real estate private credit – 4%
The proportion of offices with no private credit exposure fell from 36% to 26%.
Significantly, among offices anticipating allocation changes, 26% intended to increase their private credit exposure with 34% expected to reduce their cash balances.
The asset class is undoubtedly on a slow rise but it remains largely overlooked and underutilized.
Private credit is a particularly worthwhile complement to other assets rather than a replacement of them.
The UBS 2026 Global Family Office Report uncovered that 60% planned changes to their strategic allocation over the ensuing 12 months.
This underlines that portfolio repositioning is under active review.
And JP Morgan’s 2026 Global Family Office Report found around 55% targeted portfolio returns of 7-10%.
And 57% cited access to high-quality investment managers or products as a key motivation for using external advisers.
A diversified portfolio can still have an income allocation gap
Real estate equity and real estate debt operate and perform entirely differently – even when the underlying property market is identical.
A landlord benefits from rental income and potentially property appreciation.
Conversely, a lender earns contractual interest and fees subject to borrower performance and does not generally participate in property appreciation.
A diversified portfolio offers exposure to five key asset classes including income allocation from private credit:
Equities for long-term capital growth
Bonds and treasuries for interest income and liquidity
Direct real estate for income, appreciation and inflation-sensitive exposure
Cash for capital flexibility
Real estate private credit for exposure to property-secured lending income
Investing in real estate private credit
The Goldman Sachs and JP Morgan findings demonstrate how family offices balance return objectives, risk and operational capacity.
Treasury securities are backed by the US government – private mortgage funds are not.
Private credit may offer an additional yield premium but investors assume materially different risks.
Specialist allocations such as real estate private credit must justify those risks and complexities.
A small family office may be capable of evaluating a private real estate debt strategy without having the team required to originate loans, conduct ongoing underwriting, handling servicing and managing workouts internally.
That’s why externally managed mortgage funds exist.
How mortgage funds operate
Real estate private credit funds act as the facilitator between investors seeking income from their capital and borrowers who receive that capital to finance short-term building projects.
Typically, a fund’s investors own interests in a pool of projects rather than holding a direct lien on an individual property.
There are four key features of mortgage funds:
Senior-secured lending – First-lien positioning can provide priority over junior claims in collateral recoveries, subject to applicable law and prior claims.
Loan-to-value – Lower LTV can provide an initial collateral cushion although that protection depends on accurate valuation and subsequent property values.
Loan duration – Shorter contractual maturity may offer opportunities to redeploy or reprice capital but repayment can be delayed.
Professional management – Origination, credit assessment, servicing, concentration controls and loan resolution require specialist capability.
Understanding the risks
Like all asset classes, real estate private credit comes with risks.
Understanding these risks along with the safeguards in place to mitigate them, are fundamental to the formulation of a balanced and diverse investment portfolio.
The primary risks are:
Illiquidity and redemption restrictions – funds are usually committed for anywhere between a few months up to three years with limited or no early redemption rights. Regular distributions create the appearance of steady income but principal recovery depends on loan repayments, refinancing or asset sales at the end of the fund life.
Borrower default and collateral recovery risk – defaults can occur with recovery dependent upon the quality and enforceability of real estate collateral, foreclosure timelines, legal costs and potential shortfalls if property values have declined.
Property value and valuation uncertainty – underlying assets are illiquid and appraisals are infrequent and subjective. Mark-to-market volatility can be understated until a sale or refinance crystallises true value, complicating risk assessment.
Portfolio concentration and geographic exposure – funds concentrated in specific property types, regions or a relatively small number of loans are exposed to greater market sensitivities.
Manager and operational risk – performance hinges on the manager’s underwriting, asset management and workout capabilities.
Fees and expenses – management and performance fees, acquisition costs and fund-level expenses reduce net returns.
Tax treatment – returns are frequently taxed as ordinary income. Investors may face state tax filing obligations, UBTI for tax-exempt entities or less favorable treatment than qualified dividends or long-term capital gains.
Ultimately, real estate private credit should be used to help balance a portfolio rather than as a replacement for an investor’s emergency reserves or confused with readily accessible liquidity.
Putting a mortgage fund to the test
Not all real estate private credit funds operate identically.
When seeking to strengthen income allocation by investing with a mortgage fund, there are key questions investors should be asking.
What is the primary source of returns and how are fund expenses accounted for?
How are loans underwritten, valued and secured?
What are the fund’s leverage, portfolio concentration and liquidity policies?
What happens when a borrower defaults or cannot refinance?
Does this strategy align with the investor’s income requirements, liquidity needs and wider asset allocation?
Put your capital to work in California real estate
An 8%, 9% or 10% return isn’t inherently attractive or unattractive.
Its attractiveness depends on what an investor must risk, sacrifice and understand to earn it.
Sophisticated investors don’t simply chase yield – they interrogate it.
An 8% annual yield with monthly distributions looks a lot more attractive when it also offers:
a senior, first-lien position
a 65% average LTV capped at 75%
12-month minimum lock-up periods
minimal or no structural leverage as a defining risk management principle
Central is a professionally managed mortgage fund designed to generate monthly income through short-term loans secured by California real estate.
Learn more about the fund here and set up a no obligation chat with our team.