Discover the essentials of investing in first trust deeds, including key benefits, potential risks, and expert tips for getting started.
First trust deeds are loans made to commercial real estate borrowers, typically real estate investors, flippers, and developers, secured by the underlying property.
Investing in first trust deeds involves either issuing loans to commercial borrowers or purchasing them from a lender — the entire loan or a partial stake — and collecting principal and interest payments from the borrower. First trust deed investing offers three key benefits:
The main drawback to originating or purchasing entire commercial loans is the capital requirement — property prices in the U.S. mean investors need at least a couple hundred thousand dollars.
This is why Constitution Lending is working to make first trust deed investing more accessible. Investors seeking passive income can purchase fractions of the loans we originate, starting with just $1,000, and experience all the benefits of first trust deed investing.
This article covers everything you need to know about first trust deed investing, including its benefits, potential risks, due diligence strategies we recommend, and tips for getting started.
Constitution Lending has originated over $200MM in commercial loans since 2018. Due to the quality of our loans (low LTV, high credit scores), our investors have never experienced a principal loss. Create an investor account to get started.
As previously noted, interest rates on short-term commercial loans range from 10% to 14%. Loan investors receive interest payments over the 6 to 18-month loan term, offering higher returns compared to stocks, bonds, and CDs.
Commercial borrowers are willing to pay this higher interest rate for two reasons:
First trust deeds offer strong principal protection backed by the underlying investment property. If borrowers stop paying, investors can take ownership of and sell the property to recover their investment.
First trust deed investors are also first in line to receive proceeds from the sale, paid in full before junior lienholders or the property owner.
At Constitution Lending, we place a payment guarantee on all our loans. If borrowers default, we pay up to six months’ worth of payments out of our own pocket. During this period, we resolve the debt through loan acceleration or foreclosure. We are the only lender offering this level of protection.
Borrowers repay commercial loans within 6 to 18 months, enabling investors to quickly receive their principal and returns. This flexibility allows reinvestment into more loans or allocation to other investments based on interest rate fluctuations and market conditions.
By fractionally investing with a lender like Constitution Lending, investors can access the benefits of first trust deed investing with just $1,000.
In contrast, traditional first trust deed investing typically requires hundreds of thousands of dollars to originate or purchase loans. For example, originating a 70% LTV loan for a $600K property would require $420K.
Loan origination requires finding high-quality borrowers, underwriting their financials, servicing the loan, and potentially foreclosing if the borrower defaults.
This is impractical for the average full-time investor seeking high yields and passive income.
With fractional investing, investors can buy into the loans we’ve already originated. We handle sourcing, underwriting, and servicing, enabling investors to earn passive income.
The main risk with investing in first trust deeds, or any real estate debt, is that if the property’s value falls below the outstanding loan balance and the borrower defaults, investors may not be able to recover the full balance by selling the property.
To mitigate this risk, we recommend investing in low LTV loans, preferably below 75%.
LTV (loan-to-value) is a ratio that divides the outstanding loan balance by the property’s value. For example, if a loan’s balance is $750K and the property is worth $1MM, the LTV would be 75%.
Low LTV loans are safer because there’s more collateral backing the loan and more borrower equity to cushion any losses in property value.
For instance, investing in a 75% LTV loan means the underlying property can lose 25% of its value within the 6 to 18-month loan term — which is very rare in the U.S. — and investors can still recover the entire unpaid balance by selling the property.
That said, borrower defaults are rare if you invest in high-quality first trust deeds — loans with high borrower credit scores, strong repayment histories, and prior real estate experience.
Constitution Lending exclusively originates loans with LTVs of 75% or less, offering investors significant downside protection.
Read more: How to Invest in Hard Money Loans: A Comprehensive Guide
Purchasing fractions of loans originated by a lender is the best way to invest in first trust deeds for most investors because:
However, the greatest advantage of fractional investing with Constitution Lending is access to high-quality, low-LTV loans issued to creditworthy borrowers with long repayment histories.
We originate all the loans on our platform with our own capital — we are co-investing alongside you. Our financial success is directly tied to the performance of your investments, ensuring the highest-quality loans.
In addition, we offer a payment guarantee feature that provides cash flow if the borrower defaults. This ensures you receive fixed income throughout the entire loan term.
Here’s what investors say about our first trust deed options:
Loan origination can be a viable option for experienced real estate debt investors. These private investors have access to a network of high-quality commercial borrowers and can lend money to fund real estate projects. They also possess a strong understanding of underwriting, loan servicing, and managing the foreclosure process if necessary.
Although we don’t recommend purchasing notes on marketplaces due to their poor quality, it remains an option for many private investors. Notes platforms and mortgage brokers connect first-lien deed sellers and buyers, allowing investors to browse for loans and make purchases.
However, because note marketplaces simply connect buyers and sellers without investing alongside you, this is a risky option — you’re likely purchasing loans on the brink of default.
It’s much safer to invest with a commercial lender like Constitution Lending, who owns the majority of the loan. Our financial interest is directly aligned with yours.
Banks often pool hundreds of loans together in a portfolio sale and sell them to accredited investors.
The main drawback of this approach is the high minimum investment requirement, typically at least $2MM, making it impractical for non-institutional investors.
Start investing in fractions of the commercial loans we originate by signing up for an investor account.
| Qualification | Requirement |
|---|---|
| Minimum and maximum loan amount | $150,000 to $3,000,000 |
| Type of property | Non-owner occupied single-family, multi-family, and 5-8 unit properties |