Most people think of real estate investing as owning property. There is another position in the same transaction: being the lender. Trust deed investing puts your capital on the debt side of a real estate deal, secured by the property itself, paying monthly interest rather than rent. Here is how the structure actually works.
The three roles
Every trust deed involves three parties, and understanding them is most of the education.
The borrower owns the property and signs the promissory note, which is the promise to repay.
The lender advances the money. In a trust deed investment, that is you, or a group of investors, or a fund.
The trustee holds the security interest on the lender’s behalf and administers the remedies in the documents if the borrower defaults.
The deed of trust is the document recorded against the property that makes the loan secured rather than a handshake. That recording is the entire distinction between lending on real estate and lending on a promise.
Why it is called secured
Because there is a specific asset behind a specific loan, and the lender’s claim to it is on the public record.
Two things determine how strong that security is.
Lien position. A first position deed of trust ranks ahead of anything recorded after it. A second ranks behind the first. Position determines who gets repaid first if the property is sold to satisfy the debts, and it is the single most important structural feature of any loan you fund.
The equity cushion. The gap between the loan and the property’s value, expressed as loan to value. A loan at a conservative percentage of value has room for the market to move and for the property to be sold without a loss. A loan at aggressive leverage does not. Published leverage bands across our own programs run from LTV up to 80% on rental DSCR loans and 75% on residential bridge down to 70% on commercial property, and lower leverage goes with situations where the borrower’s profile carries less of the file.
How the money flows
The mechanics are simple, which is much of the appeal.
The borrower makes a monthly interest payment, because short-term real estate loans are almost always interest only. A servicer collects that payment and remits it to the lender of record. When the loan is repaid at its exit, whether by sale or refinance, the principal returns.
So a trust deed position produces monthly income and a return of capital at the end of the term rather than a gain on a sale. The length of the term is the length of the commitment, which is why the loan’s maturity matters to an investor as much as the rate does.
What decides the quality of a loan
Four things, and they are the same four a borrower is underwritten against.
The property. What is it, where is it, how liquid is the market for it and how easily could it be sold.
The equity. How much cushion sits between the loan and a loss, measured against a valuation you trust. Our post on how a lender values your property covers how that number is produced.
The exit. How the loan is repaid. A sale supported by comparable sales, or a refinance supported by the numbers a takeout lender will actually use. Our post on exit strategy explains why this is the question that matters most.
The borrower. Track record, liquidity and whether they have finished projects like this one.
A high rate on a loan that fails those tests is not a high yield, it is a warning.
Who can invest
Rules on who may participate in a hard money offering, and in what form, are set by securities regulation and vary by structure. Some opportunities are limited to accredited investors, some are structured as fractional interests in a single loan and some as a pooled fund, and each has different requirements.
That is a question for the sponsor’s offering documents and for your own attorney and financial advisor, not for a blog post. What is consistent is that the answer should be clear, documented and given before you commit anything.
The risks worth understanding
Borrower default. The loan stops paying and the remedies in the documents become the path. Timelines and procedures vary by state and by situation. The equity cushion is what determines whether that path ends well.
Property risk. Condition, market movement and liquidity. A property that cannot be sold quickly is a slow resolution regardless of the paperwork.
Position risk. A second position behind a large first has a thinner cushion by construction. That does not make it a bad investment, it makes it a different one, priced accordingly.
Illiquidity. Your capital is committed for the term. There is no exchange to sell into.
Concentration. A single loan is a single property and a single borrower.
None of these are reasons not to invest. They are the reasons to read the documents, understand the collateral and take independent advice before committing capital.
What a lender in our position handles
Origination, which means finding and screening the borrowers. Underwriting the property, the borrower and the exit. Preparing and recording the documents. Servicing, meaning collecting payments and remitting them. And administering the file if something goes wrong.
Loan Goat has closed more than 1,300 loans since 2022 and funded over $1.5B across 46 states from our San Diego office, as a veteran owned company with NMLS 1416824 and branch NMLS 2554618. The trust deed investing guide covers the structure in depth and the invest page covers how it works here.
Before you start
Read the investor FAQ, read the definitions page for every term you are not certain about, and take independent legal and tax advice on the structure. Then ask any sponsor the four questions above about a specific loan and see how quickly and precisely they answer. Reach us at (619) 617-2797.
