Private Credit vs. Banks Loans: How Non‑Bank Lenders Are Powering the Next Era of Real Estate Financing

What Is Private Credit in Real Estate — and Why Investors Are Turning to It

Defining Private Real Estate Credit

Private credit refers to debt capital provided by non-bank institutions—such as private debt funds, mortgage REITs, and alternative lenders—to borrowers without access to (or preference for) traditional bank loans. In real estate, this means private entities underwriting loans for investment properties, development, fix-and-flip deals, and stabilized rental portfolios.

Unlike conventional bank mortgages, which often rely heavily on personal income verification and credit history, many private credit lenders evaluate deals based on the cash flow potential of the property. This underwriting flexibility allows them to support real estate use cases that banks may under-serve or reject entirely.

The Scale of Private Credit

The private credit market has exploded over the past decade. According to McKinsey, by the end of 2023, private credit assets totaled nearly $2 trillion, approximately ten times what they were in 2009 (per McKinsey & Company). Global private credit commitments—including business development companies, collateralized loan obligations (CLOs), and private debt funds—are estimated even higher.

In the context of real estate, PGIM estimates that the U.S. private CRE (commercial real estate) credit market is a $4.8 trillion opportunity — a scale comparable to major fixed income markets. That kind of capital is not trivial: it signals that private real estate debt is no niche play; it's now an institutional-scale asset class.

Why Traditional Banks Are Pulling Back from Real Estate Lending

The reasons for the bank retreat in real estate are multifaceted — regulatory, competitive, and structural.

1. Regulatory Pressure & Risk Sensitivity Since the financial crisis, banks have faced increasing capital requirements, making them more cautious about leveraged or non-traditional lending. According to an IMF analysis, tighter bank regulation has encouraged credit flows toward non-bank lenders, who aren’t subject to the same risk-sensitive capital charges.
2. Slower, More Conservative Underwriting                                                                             For many real estate investors, banks remain cumbersome. Rigorous income verification, long approval timelines, and limited underwriting flexibility make bank financing less appealing for opportunistic or speed-sensitive deals like flips or short-term rentals.
3.  Decline in Bank Origination for CRE                                                                       Alternative lenders are stepping in as banks step back. Brookfield notes that between October 2023 and October 2024, commercial real estate loan origination by non-bank lenders rose by 34%, while traditional bank lending declined by 24%.
4. Institutional Reallocation                                                                                              Major PE and credit firms are doubling down on private credit. For example, S&P Global reports that Blackstone’s credit arm — which includes real estate — reached $432.3 B in AUM by Q3 2025 (per S&P Global). As institutional capital shifts, banks are losing ground in their traditional financing turf.

How Private Credit Lenders Are Gaining Traction in Real Estate

Private credit lenders are not simply replacing banks; they are creating new models of real estate financing — faster, more flexible, and better aligned with the risk-reward profile of modern real estate investors.

1. Debt Structure Innovation

● DSCR (Debt Service Coverage Ratio) Loans: These loans assess a borrower’s eligibility based on the property’s net operating income (NOI), not personal income, making them ideal for real estate investors who don’t rely on W-2 income.

● Bridge & Fix-and-Flip Loans: These are structured for short-term needs — rehabbing a property, then refinancing or selling.

● Construction Loans: Private credit lenders are now underwriting ground-up development, offering faster decision-making and tailored terms.

2. Diversified Property Types

Private real estate credit is not limited to conventional asset classes. According to Invesco, debt funds increasingly finance industrial real estate (warehouses) and data centers — both highly attractive for their steady cash flow and secular demand.

3. Strong Flow of Institutional Capital

Private real estate debt funds are scaling fast. According to PGIM, real estate debt AUM is expected to reach $746 B in five years. Meanwhile, real estate fundraising in private markets is also robust. According to FEG’s Private Capital Quarterly Review, private-label CMBS issuance surged to $103.6 B in 2024, nearly triple 2023 levels (per Fund Evaluation Group).

4. Return & Risk Profile

Private CRE credit is showing compelling risk-adjusted returns. PGIM reports that private CRE credit strategies have delivered Sharpe ratios nearly twice those of other fixed income indices, thanks to elevated yields and lower volatility. That makes these strategies not just high-yield, but efficient from a risk-return standpoint.

5. Resilient in Market Stress

Even amid rate uncertainty, private credit continues to attract capital. According to CRE Daily, private credit posted a 2.0% return in Q1 2025, outpacing both private equity (1.8%) and real assets (1.8%). This performance underscores investor conviction that private credit is not just an opportunistic play — it’s a long-term allocation.

The Real Estate Investor’s Perspective: Why Private Credit Matters

To understand why private credit is so compelling for real estate investors, we interviewed Ridge Street Capital, a leading private lending firm that underwrites DSCR, fix‑&‑flip, and construction loans.

“Debt Service Coverage Ratio based underwriting is driving more residential real estate investors to private lenders than ever before,” says Zach Cohen, founder of Ridge Street Capital. “Investors are looking for cost effective financing solutions that move faster than convetional bank financing — and that’s what we deliver.”

Here’s why real estate investors are increasingly turning to firms like Ridge Street Capital:

• Faster Execution: Bank approvals can drag for days or weeks. Private lenders often close in a fraction of the time, enabling investors to act on deals quickly.
• Cash Flow–Based Underwriting: DSCR loans underwrite based on property income, unlocking borrower eligibility for those without traditional income documentation.
• Flexible Terms: Whether someone is flipping a home, bridging to a permanent loan, or building a rental property from scratch, private credit can offer tailor-made covenants, amortization schedules, and exit strategies.
• Scaling: With access to debt from private lenders, investors can scale faster, doing more deals in more markets — something Ridge Street Capital has witnessed first-hand.

“Private credit is allowing investors to scale faster because deals aren’t held up by conventional bank red tape,” Cohen explains.

Risks and Tradeoffs: What Investors Should Be Careful Of

Private credit offers compelling advantages, but it's not risk-free. Here are some of the key considerations for real estate investors:

1. Higher Cost of Capital                                                                                             Private credit loans typically carry higher interest rates than bank loans. According to real estate finance research, private credit can be 0.5–1.5% more expensive than traditional bank debt, depending on the deal’s risk profile and structure.
2. Shorter Terms & Prepayment                                                                                          Risk Some private real estate loans are designed for short-term holds. Prepayment penalties or balloon payments are more common, meaning borrowers need a clear exit strategy.
3. Due Diligence Risk                                                                                                             Not all private lenders are equal. The quality of underwriting, track record, and risk controls vary widely. Investors should vet lenders carefully, reviewing their loan performance history, default rates, and transparency practices.
4. Liquidity Constraints                                                                                                                Unlike publicly traded bonds, private credit loans are illiquid. If market conditions change, it may be more difficult (and expensive) to exit a position.
5. Regulatory Risks                                                                                                                     As private credit grows in scale and influence, it may face regulatory scrutiny. While private credit currently benefits from looser capital constraints than banks, that could change if policymakers respond to systemic risk concerns. McKinsey warns that private credit is at a crossroads — “a new ecosystem is emerging” as banks, insurers, and asset managers navigate the changing landscape.

Future Outlook: Why Private Credit Will Likely Continue to Dominate Real Estate Debt

Examining current trends, several key factors suggest that private credit’s dominance in real estate is not just a cyclical phenomenon — it’s a structural evolution.

1. Institutional Investor Demand

Allocations to private credit from institutional investors are accelerating. According to CRE Daily, nearly 50% of institutions are exploring niche private credit areas such as real estate debt. As insurance companies, pensions, and endowments push for yield and uncorrelated returns, private real estate credit becomes increasingly attractive.

2. Capital Formation Momentum

Real estate credit funds are scaling rapidly. PGIM’s projections place real estate debt AUM at $746 B within five years. This capital avalanche feeds directly into more lending capacity for real estate investors.

3. Non-Traditional Real Estate Sectors

Alternative lenders are financing growth sectors — like industrial, logistics, and data center real estate — through debt strategies. Invesco highlights that these real estate verticals are especially well-suited for private credit due to their stable cash flows and secular tailwinds.

4. Persistent Banking Disintermediation

As regulatory capital remains tight, banks are unlikely to reclaim their previous dominance in CRE lending. Meanwhile, private lenders with specialized underwriting expertise are uniquely positioned to serve undercapitalized segments of the market.

5. Attractive Risk-Adjusted Returns

Private CRE credit’s performance, particularly its risk-adjusted return profile, is creating lasting appeal. With Sharpe ratios significantly above traditional fixed income, it's becoming an anchor allocation in many yield-seeking portfolios.

How Real Estate Investors Can Leverage Private Credit (with Ridge Street Capital as an Example)

Here are some practical strategies that real estate investors—and firms like Ridge Street Capital—can use to tap into this wave effectively:

1. Build Relationships with Private Lenders .

● Connect early with firms like Ridge Street Capital to understand their underwriting criteria, deal flow, and risk appetite.

● Share detailed pro formas and business plans. Private lenders evaluate cash flows, exit strategies, and borrower experience closely.

2. Structure Deals Strategically.

● Use DSCR loans for rental acquisitions. These loans allow you to qualify based on the income of the property, not your personal W-2.

● For renovations or flips, use bridge or fix-and-flip financing to bridge costs, then refinance into a permanent loan or exit via sale.

●In ground-up development, lean on private construction lenders to provide faster and more flexible capital than traditional regional banks.

3. Mitigate Risks.

● Ask lenders for past performance data, default rates, and loss experience.

● Negotiate prepayment terms, especially on short-duration loans.

● Diversify your financing partners. Don’t rely on a single private lender; spread risk across different funds / credit providers.

4. Align with Institutional Capital Themes.

● Leverage private credit to finance real estate in secular growth areas (e.g., industrial, data centers).

● Structure projects for cash flow stability; this aligns well with the underwriting models of private real estate debt funds.

5. Scale Wisely.

● As your access to private credit grows, reinvest capital prudently.

● Use cash-flow-based financing to build a scalable, sustainable real estate portfolio.

● Consider co-investment or joint ventures with private lenders when possible.

Conclusion: Private Credit Isn’t Just Replacing Banks — It’s Reimagining Real Estate Finance

Private credit is no longer an alternative or afterthought—it’s now a cornerstone of real estate financing. The scale (with private CRE credit markets measured in the trillions), the sophistication of debt structures, and the flood of institutional capital backing it make this a structural shift. Banks are still relevant, but their role is evolving.

If you’re investing in real estate today — whether acquiring rentals, flipping properties, or building from the ground up — private credit should be part of your capital toolkit. Understanding how to structure deals, evaluate lenders, and mitigate risk can position you at the forefront of the new era of real estate finance.