Investing in debt means lending money to an entity (e.g., individual borrowers, corporations, or governments) in return for periodic interest payments and the repayment of principal at maturity.

Credit markets are massive; they include government bonds, corporate debt, real estate debt, personal debt, and more. We can’t cover how to invest in every single type of debt in one article.

Instead, we’ll focus on short-term real estate debt, as we’ve found that it tends to be the best option for non-institutional investors. It offers a balance between high interest returns (interest on short-term real estate loans is between 10% to 14%) and strong capital protection.

When you invest in real estate-secured debt, you become a senior secured creditor. If the borrower defaults, you have the right to seize and liquidate the property and use the sale proceeds to recover your principal investment and interest payments.

For additional capital protection, high-quality debt is secured by real estate worth much more than the borrowed amount. Even if property values decline, it may still enable full repayment of principal and interest. You don't get this capital protection with other types of debt.

For example, suppose you invest in a $700K loan secured by a $1MM property, and the property’s value drops to $700K. You can liquidate the property, recover your full $700K principal investment, and the borrower absorbs the loss.

In this article, we cover how individual, non-institutional investors can start investing in real estate debt, including factors to consider so you’re only investing in safe, high-quality debt.

Who are we? Constitution Lending is a private money lender who has originated over $300MM in real estate-backed loans. Open an investment account and invest in shares of these loans, starting with just $1,000.

How Non-Institutional Investors Can Start Investing in Secured Debt

Investing in secured debt once required investors to originate their own loans, meaning they had to personally source and lend to creditable borrowers.

However, loan origination isn’t practical for multiple reasons:

1. Most investors lack the time and expertise to source deals, underwrite applications, service loans, or potentially manage foreclosures and liquidate collateral.

2. Originating real estate loans typically cost upwards of $300K, due to the price of real estate in most cities.

This is why more investors are partnering with lenders and purchasing shares in loans that they have already originated.

Through fractional investing, investors leverage the underwriting and loan servicing expertise of an existing lender, eliminating the need to source and underwrite deals themselves. They can also start with a substantially smaller amount, sometimes as little as $1,000, like with Constitution Lending.

Here are six factors that can help you identify high-quality loans and filter out riskier ones. They also apply if you’re considering lending capital directly to borrowers.

Read more: How to Buy Mortgage Notes with as Little as $1,000

1. What’s the LTV Ratio on the Loan?

The first metric to consider before investing in secured loans is the LTV, or loan-to-value ratio.

LTV is a ratio comparing the loan amount to the value of the underlying collateral. Using the example above, a $700K loan secured by a $1MM property has an LTV of 70%.

Lower LTV loans have more borrower equity to protect against market and default risk, making them safer. We recommend investing in loans with an LTV ratio of under 75%.

A 75% LTV means the property can lose up to 25% of its value — which is rare and unlikely, given that real estate is a stable investment that doesn’t fluctuate significantly in the short term — and investors can still recover their entire principal by liquidating the collateral.

Sticking with the example above, the $1MM property would now be worth $750K. Investors can then liquidate the property and recover their $750K principal. The borrower’s equity protects against the market downturn.

Equity investments don’t offer this level of downside protection.

With Constitution Lending, our debt investment options feature LTV ratios of 75% or less, providing investors with significant capital protection.

2. What’s the Lien Position of the Loan?

Investors should consider the position of their investment in the capital structure because it determines the order in which sale proceeds are used to pay off creditors.

Usually, senior creditors are paid first and in full. If there are any sale proceeds left over, investors in subordinated debt or mezzanine loans are paid. Borrowers retain the remaining funds once all creditors have been paid.

We recommend investing in debt where you sit on top of the capital structure as a senior creditor. This means you get paid in full before investors in other loans on the property.

For example, suppose there are two loans secured by a $10MM property. A senior loan of $8MM and a subordinated loan of $4MM. When the $10MM property is sold, investors in the senior $8MM loan are paid in full, and the remaining $2MM is distributed to investors in the subordinated loans.

For maximum capital protection, Constitution Lending only originates loans secured by a senior position in the capital structure.

Read more: How to Invest in Private Mortgages: A Detailed Guide for Investors

3. What’s the Interest Rate on the Loan?

Investors need to assess the borrower’s interest rate since it ultimately defines the yield they can expect from the loan. Our short-term hard money loans (typically used to rehab and construct investment properties) have interest rates between 10% and 14%.

Investors should also understand the repayment schedule as it affects their cash flow frequency and financial planning. Do borrowers make interest payments monthly or quarterly, or is the interest accrued and paid in a lump sum at the end of the term?

At Constitution Lending, our borrowers make monthly interest payments, so investors receive steady cash flow throughout the loan term. We also have provisions in place to ensure investors receive monthly interest payments even if the borrower doesn’t pay (more on this below).

4. What’s the Quality of the Borrower?

A credit score is one of the most dependable indicators of a borrower’s repayment capacity and intent. As a result, we recommend evaluating a borrower’s credit score and personal finance history before investing in a loan.

When making investment decisions, investors should target loans where the borrower has a credit score of 660 or above.

Investors should also assess the borrower’s track record with rehabbing properties. Do they have a history of successfully fixing and flipping properties, or have they constantly defaulted due to poor execution?

At Constitution Lending, we work with high-quality borrowers who have credit scores of 660 or above, with the majority exceeding 700.

5. What’s the Location of the Underlying Property?

Investors should consider the property’s location and invest in areas where real estate prices are rising.

Investors should conduct their due diligence to determine whether the area they wish to invest in is experiencing job growth, population increase, infrastructure spending, or gentrification. These factors impact a borrower’s ability to sell the property post-rehab at a profit and repay the loan balance.

In high-growth locations, real estate would be worth more at the end of the loan term compared to when the loan was originated, providing an additional borrower equity cushion.

When you invest fractionally with an experienced lender like Constitution Lending, you utilize our industry knowledge and underwriting insights.

We conduct thorough due diligence on factors such as neighborhood-level trends, local laws, rent rolls, occupancy rates, and job growth before issuing a loan and focus our lending on growth markets.

6. How Long is the Loan Term?

You should evaluate the length of the loan before making an investment decision, as it determines how quickly you’ll receive your principal investment.

With commercial real estate debt, loan terms range from 6 to 18 months, so you receive your capital soon after making your initial investment. This short investment horizon gives you a lot of flexibility to reinvest more often or redirect funds toward other opportunities that align with your financial goals.

Most other types of debt, including corporate debt, have long terms, usually 10+ years. Investors are locked in and unable to access their principal investment quickly.

If You Invest with a Lender, Consider These Factors

Do They Originate All Loan Opportunities with Their Own Capital?

The most important due diligence factor to consider when investing fractionally through a lender is whether they invest alongside you in the same loans. This means the difference between investing in high-quality debt with substantial capital protection or bad loans on the verge of default.

At Constitution Lending, we originate every loan opportunity available on our platform using our own capital. This means that our financial outcomes align with yours. Investors have confidence knowing that we only feature loans that we have our money in and believe will perform.

Many so-called investment platforms primarily function as marketplaces, earning fees whenever someone lists a loan for sale. They are incentivized to list any loan, including those nearing default. 

Do They Offer Any Default Risk Protections?

We advise investing with lenders who have provisions in place to protect against borrower defaults. This way, you receive predictable monthly interest payments without delay or drama.

Constitution Lending is one of the only lenders that offer a payment guarantee on all loan opportunities. We pay you interest payments with our own money in the event a borrower misses a payment. We can settle up to 6 months of interest payments.

However, as we discuss in more detail below, our payment guarantee is seldom needed because of the quality of borrowers we lend to.

Does the Lender Have a Low Borrower Default Rate?

A lender’s borrower default rate is another strong indicator of the quality of the mortgage loans they originate.

Borrower default rate is the percentage of borrowers that stop paying. For example, if 5 out of 100 borrowers end up not paying, the default rate would be 5%.

With Constitution Lending, our default rate is just 2%. For context, the national average default rate on real estate debt is 4%.

How to Invest in Constitution Lending’s Real Estate Backed Loans

1. Create an investment account and connect your bank or retirement account. Once your setup is complete, you’ll gain access to a dashboard displaying all available loan opportunities.

2. Each listing provides key details such as the loan’s interest rate, term, LTV ratio, and an assigned risk rating.

3. If a particular loan catches your interest, click on it to view a more detailed breakdown. This includes the total loan amount, expected net yield, lien position, both as-is and after-repair LTVs, and the borrower’s credit score.

4. To invest, simply select “Fund This Loan” and enter the amount you’d like to commit.

5. After your investment is confirmed, you’ll start receiving monthly interest payments — typically on the first of each month, generating annualized returns of 10% to 14%.

6. When the 6 to 18-month term is complete, your principal is returned. You can reinvest into more loans or withdraw your investment.

Alternatives to Investing in Real Estate Secured Debt

Government Bonds

The U.S. government issues bonds to raise capital for public spending and to fulfill its financial commitments.

U.S. government debt is widely regarded as the safest form of debt, backed by the full faith of the U.S. government, which has never defaulted on its debt obligations. In fact, the interest rate on government bonds is often referred to as the “risk-free” rate.

Government securities are considered low risk and offer predictable interest payments with a fixed maturity date. This makes them an appealing investment option for conservative investors seeking capital preservation. You can invest in these securities through a money market fund.

The downside, however, is that treasury bills’ annual returns are significantly lower than those of most other forms of debt, as well as the stock market, ranging from 4%–5% annually.

Pros

• High credit safety, especially from stable governments
• Predictable, fixed income
• Highly liquid and actively traded
• Often used as a benchmark for interest rates

Cons

• Low yields, especially in low-interest-rate environments
• Vulnerable to inflation risk and interest rate fluctuations
• No asset backing (unlike real estate-secured debt)

Corporate Debt

Investing in corporate debt involves lending money to companies in the form of bonds or notes in exchange for regular interest payments. Investors could also invest with an equity fund or liquid fund that does so.

The risk and return profiles vary depending on the company’s creditworthiness. Investment-grade corporate bonds offer relative safety with moderate returns because these companies have strong financials and proven repayment history. However, due to the lower risk, they also offer lower interest rates.

On the other hand, high-yield or “junk” bonds offer higher potential returns but carry increased credit risk.

The primary drawback of corporate bonds, regardless of their credit rating, is that the debt isn’t secured by a stable asset, such as real estate. Consequently, if a company defaults, investors have no recourse to recover their principal. 

Even if the debt is secured by company assets, such as equipment and intellectual property, these are difficult to value and sell. This makes them inherently higher risk than debt secured by real estate.

Corporate debt also has a higher interest rate risk due to its long duration. It has terms of 10+ years, while real estate debt has a shorter investment horizon, between 6 and 18 months.

Pros

• Potential for higher yields than government bonds
• Wide variety of risk/return profiles
• Generally liquid and tradable in secondary markets
• Can be used to diversify a fixed-income investment portfolio

Cons

• Exposed to corporate credit risk and potential default
• Not backed by tangible assets in most cases
• Subject to market volatility and economic cycles
• Lower position in capital structure compared to secured debt

Municipal Bonds

Municipal bonds are issued by states, cities, or local governments to finance public projects, including schools, roads, and infrastructure. 

In the U.S., the interest earned from municipal bonds is often exempt from federal — and sometimes state and local — income taxes, making them a good option for investors in higher tax brackets. Debt mutual funds offer a way to invest in municipal bonds.

While generally safe, especially those backed by a taxing authority, their yields are lower than those of real estate-secured investments and may carry political or regional risk.

Pros

• Tax-advantaged income (federal and sometimes state/local)
• Generally low credit risk for highly rated issuers
• Supports community development and infrastructure
• Lower correlation to corporate and real estate markets

Cons

• Lower yields compared to taxable alternatives
• Political and budgetary risk at the municipal level
• Limited liquidity in smaller issues
• May underperform in rising interest rate environments

Asset-Backed Securities (ABS)

Asset-backed securities (ABS) are bonds secured by pools of income-generating assets. Asset allocation may include auto loans, credit card receivables, or student loans.

By investing in these bond funds, investors receive payments derived from the cash flows generated by these assets.

ABS offers strong investment portfolio diversification by spreading risk across various types of consumer debt and underlying assets. In addition, ABS can deliver attractive yields — credit card receivables yield around 15%, while auto loan-backed securities typically offer 5%–8% returns.

That said, their complexity and exposure to consumer credit risk can make them less transparent than direct investments in real estate-secured debt.

Pros

• Can offer attractive risk-adjusted returns
• Provides exposure to consumer credit markets
• Diversifies sources of fixed income
• Often structured to prioritize investor repayment (tranches)

Cons

• Complexity and lower transparency
• Exposure to consumer default risk
• May perform poorly during economic downturns
• Less liquid than government or corporate bonds

Convertible Bonds

Convertible bonds are hybrid securities that start as debt instruments but can be converted into shares of the issuing company’s stock. This makes them a good option for investors looking for fixed-income stability with potential upside from equity appreciation. 

While convertible bonds usually offer lower interest rates than traditional unsecured corporate bonds, the embedded conversion option can be valuable if the company does well and the value of its shares rises above the dollar amount investors lent. 

However, like unsecured corporate bonds, convertible bonds are also not secured by a stable, easily valued asset. As a result, there is no comparable capital protection to real estate-secured debt.

Pros

• Potential for equity upside in addition to fixed income
• Downside protection compared to direct stock ownership
• Attractive in bullish equity markets
• Can benefit from both bond and equity price movements

Cons

• Typically lower interest payments than straight debt
• More volatile due to equity sensitivity
• Complex valuation and performance drivers
• Subordinated status in the event of default

Invest in High-Quality Real Estate Secured Debt with Constitution Lending

While past performance doesn't indicate future returns, our investment strategy of originating low LTV hard money loans provides investors with significant downside protection and enables them to earn 10% to 14% interest annually.

Open an investment account or speak to one of our fund managers to learn more about our real estate debt options.