Becoming an accredited investor opens the door to investments non-accredited investors can't access (e.g., private equity, private credit, venture capital, real estate, commodities, collectibles). Each offers a premium for accepting a tradeoff the public markets don't require, whether that's reduced liquidity, greater complexity, a longer time horizon, or less transparency.
There's no single best alternative investment. The right one depends on you, on your risk tolerance, how soon you need access to your capital, your tax situation, and the returns you're aiming for. An investor looking to maximize returns and one seeking protection from market downturns typically won’t make the same choice.
In this article, we explore the main alternative investment strategies available to accredited investors in private markets, and cover the return, risk, and liquidity tradeoffs each one presents, so you can decide which is right for your situation. This article is based on our experience as accredited investors and managers of a real estate credit fund.
1. Non-Performing Real Estate Loans
A non-performing real estate loan is a mortgage on which the borrower has stopped making payments, usually for more than 90 days.
The original lender, normally a bank, wants to recover its capital rather than manage a defaulted loan, so it sells the debt to an investor. The investor takes over the bank's position, gaining the right to collect the balance or recover it through the underlying property.
Non-performing loans have three mechanisms that, used together, can produce strong returns with significant capital protection: default interest rates, loan-to-value (LTV), and resolution flexibility.
Note: At Constitution Lending, we're debt resolution experts who manage a real estate credit fund of non-performing commercial loans, so we'll use it throughout as the working example. If you'd like to learn more about how our fund operates, you can book a call with a portfolio manager.
Default Interest Rates: This is the Driver of Higher Returns
Every mortgage carries a contract rate, the normal interest rate borrowers pay while the loan is current. Once they default, the loan switches to a higher penalty rate known as the default interest rate.
But borrowers don't pay this default rate month to month because they have already defaulted.
Instead, the default interest accrues. Each month it adds to the balance borrowers already owe, which climbs while the debt remains unresolved. You collect the accrued default interest at resolution, when the property is liquidated, and sale proceeds are used to settle the balance.
For the Constitution Lending credit fund, we purchase non-performing loans secured by commercial properties, with high default interest rates typically between 18% and 24%. This is a major driver of our fund's higher returns.
Low LTV (Loan-to-Value): This Provides Your Downside Protection
LTV stands for loan-to-value, and it's a ratio that compares the owed amount to the value of the underlying property. For example, a $600,000 loan on a $1 million property has an LTV of 60%. The remaining 40% is the borrower's equity, the share of the property's value that sits below the debt.
That equity cushion is what makes the default interest actually collectible. The default rate only earns you anything if there's room for the balance to grow into.
As the accrued interest piles onto the balance, the owed amount climbs toward the property's value, and as long as it stays below that value, every dollar you're owed is backed by enough collateral to pay it. When the property is liquidated, the sale proceeds cover your principal plus all the accrued interest.
Here's how that plays out on a low-LTV loan:
- Property value: $2 million
- Starting loan balance: $1 million (50% LTV)
- Default interest rate: 20%
- If it takes three years to resolve the debt, the balance grows to roughly $1.6 million, still well under the property's value of $2 million.
- Through all three years, the accrued interest remains within the property’s stated value. This collateral cushion can give you time to let a foreclosure run its course or allow the borrower to sell while the balance continues to grow.
At Constitution Lending, most of the loans in our fund have an LTV below 50%, which gives us enough time to resolve the debt and collect the full accrued default interest.
This combination of high default interest and low LTV is what gives the fund strong risk-adjusted returns compared to unsecured lending.
Multiple Pathways to Profitability: We're Never Locked Into a Single Exit Strategy
Most alternative investments have one exit strategy. For example, with venture capital, a startup either grows and reaches a large exit, or it doesn't, and the entire return depends on that one outcome. With collectibles like fine art or watches you only profit if someone later pays more than you did.
Non-performing loans work differently because the resolution adapts to the borrower's situation. Recovering your principal and the accrued default interest doesn't hinge on any single path working out. For example, you can pursue:
- Loan modification: You can modify the loan agreement, get the borrower making payments again, and sell the loan for more than what you paid.
- Sale or refinance: If the borrower has equity to protect, they can refinance the loan or sell the property, and pay off the full balance, including the accrued default interest.
- Foreclosure: If the borrower isn't cooperative and doesn't want to modify, sell or refinance, you can foreclose on them and take control of the property.
- Deed-in-lieu: When a borrower owes you more than the property is worth, you can offer a deed-in-lieu, where they sign the property over to you and you release them from what they still owe.
Why Most Investors Access Non-performing Loans Through a Fund
Most accredited investors can't capture the benefits of non-performing loans on their own, because doing so takes significant expertise, time, and effort. You have to:
- Build relationships with banks and credit unions
- Underwrite each one to ensure they have high default interest rates and low LTV
- Check for title and tax-lien problems
- Value the collateral
- Negotiate with borrowers
- Read each deal and choose the right way to resolve it
- Run foreclosures through a legal process that varies by state
- Comply with the servicing and licensing rules for collecting on debt
Each of these is a specialized skill, and the return depends on doing all of them well.
In addition, buying non-performing loans directly takes serious private capital, with institutional loan pools often reaching $1 million or more. Participating in Fannie Mae or Freddie Mac loan sales also requires approval as an eligible bidder. These barriers have kept this corner of private investing largely dominated by institutional investors and banks.
At Constitution Lending, our credit fund does all the hard work for you.
We've been resolving real estate debt for over 10 years, and we will source, underwrite, and resolve the loans in-house, so you get exposure to the returns without having to build any of that expertise yourself.
Invest in Non-performing Loans with Constitution Lending
If you'd like to see how our credit fund invests in non-performing loans, book a call with one of our portfolio managers. They'll walk you through our investment strategies, answer your questions, and help you decide whether the fund fits your goals.
2. Performing Real Estate Loans
A performing real estate loan is a mortgage where the borrower is current, the same basic structure as a non-performing loan, minus the default. Investors originate or buy these loans directly, or gain exposure through a fund, and collect interest payments backed by real property.
The return comes from interest, providing steady passive income similar to private credit, but the collateral is different. Because the loan is secured by real estate rather than a company's cash flow or assets, if a borrower stops paying, the lender can foreclose and recover through the underlying property.
The premium exists because these loans are illiquid and not accessible through public bond markets, so you're paid for stepping into a lending role banks and public markets don't fill directly.
Performing real estate loans score well on downside protection and correlation. Real estate collateral historically holds tangible value, so if a borrower does eventually default, there's a hard asset to recover through. And because it's a private, negotiated loan, returns don't swing with public markets.
At Constitution Lending, we originate real estate loans and give investors the ability to fractionally invest in them, providing steady, contractual income backed by the same disciplined underwriting we apply across the portfolio: low LTV, real property collateral, and borrowers we've already vetted.
If you'd like to learn more about our performing loans, sign up for a free investment account and browse our available loan options.
3. Private Credit
Private credit involves lending directly to private companies, usually mid-sized businesses that don't fit traditional bank lending.
Since the pullback in bank lending after 2008, private credit has grown into one of the largest categories of private investments, and it's a common allocation for family offices and accredited investors who want yield without buying public bonds.
The return comes from interest. A private credit fund lends to companies at rates well above what public fixed income pays, often floating rates several points over a benchmark, and passes that yield through to investors. The premium exists because these loans are illiquid and because the borrowers can't access cheaper public capital, so lenders are compensated for stepping into a gap the banks left.
Private credit scores well on return and correlation. Yields are meaningfully higher than public bonds, and because the loans are privately held, returns don't swing with the market volatility that affects traded bonds.
However, private credit tends to be weaker when it comes to downside protection and liquidity. Many private credit loans are secured only by the borrowing company's cash flow or assets that are hard to value and sell, so if a borrower defaults, recovery depends on the health of a struggling business.
Liquidity is also limited. Your capital is committed for around seven to 10 years, and because there's no active secondary market for these loans, there's no easy way to exit early.
Private credit fits an investor who wants steady income above public fixed income and is comfortable taking on corporate credit risk in exchange for it. The tradeoff to understand is what actually secures the loan: when the collateral is a company's ongoing operations rather than a tangible asset worth more than the debt, your downside depends on that business performing.
4. Private Equity
Private equity funds buy entire companies, typically mature private businesses, then seek to increase their profits, pay down acquisition debt, and eventually sell them for a profit. Investors, as limited partners, commit capital to a fund, and the general partner combines it with significant debt financing to acquire and eventually exit a portfolio of companies.
The return comes from three levers:
- Multiple expansion: A fund can sell a company outright or take it public through an IPO at a higher valuation multiple than it paid.
- Revenue and profit growth: It can grow the company’s revenue and profits so the business is worth more.
- Debt repayment: It can use the company’s cash flow to pay down the debt used to acquire it, increasing the equity value even if nothing else changes.
Most funds pull all three levers simultaneously. The catch is that every one of these levers depends on the same two things: the company performing and a buyer willing to pay up at exit. Returns are also reduced by management fees and carried interest, which together typically claim a meaningful share of the fund's profits before investors see a dime.
Private equity's strength is its return potential. Top funds have historically outperformed public equities, a level of outperformance that's been difficult for retail investors to access through public markets alone, and the use of leverage amplifies gains when things go well.
But it scores poorly on downside protection and correlation. You hold an equity position, so you're last in line to get paid during liquidations; creditors have priority over equity holders, although they may not recover everything they’re owed. Additionally, the leverage that amplifies upside also amplifies losses just as sharply.
Because it's ultimately corporate equity, it tends to move with the broader economy, so it offers less genuine diversification from a stock-heavy portfolio. Liquidity is the weakest point of all, with capital typically locked up for seven to ten years.
Private equity works for an investor prioritizing higher long-term return potential who can leave capital untouched for a decade and absorb the risks associated with leveraged equity. The tradeoff is limited downside protection and a very long investment horizon.
5. Real Estate
Real estate investing means owning property directly or through a fund, and profiting from rental income, appreciation, or both. Investors can buy properties themselves, or pool capital with others through syndications or private real estate funds that acquire, manage, and eventually sell property, as opposed to publicly traded REITs, which trade like stocks and move more closely with public markets.
The return comes from two sources: the annual income the property generates while you hold it, and the price appreciation when you sell. A fund might target cash-flowing multifamily or commercial buildings for steady income, or value-add deals where the plan is to improve the property and sell at a higher valuation.
Real estate's strength is that it's backed by a tangible asset investors can see, value, and use as collateral, which gives it real downside protection compared to unsecured equity positions like private equity or venture capital. It also offers a hedge many investors want: rental income tends to hold up even when public markets are down.
Where it falls short is correlation and liquidity. Real estate values are tied to the broader economy, interest rates, employment, and local market conditions, so it doesn't diversify a portfolio as cleanly as something like non-performing loans. And unlike stocks, you can't sell a building in a day: capital is typically locked up for years, and exiting early usually means selling at a discount.
Real estate fits an investor who wants a tangible, income-producing asset and is comfortable with a return that moves somewhat with the broader economy. The tradeoff is limited liquidity in exchange for an asset you can see, touch, and directly control.
