Private debt refers to loans issued by non-bank lenders, such as investment funds or institutional investors, to borrowers who cannot or choose not to borrow from a bank.

With private debt investing, you can either lend money directly to borrowers or invest in a fund that does it for you. In both cases, your return comes from regular principal and interest payments.

There are various types of private debt that you can invest in, each with its own distinct risk and return profile.

For instance, investing in corporate loans made to large companies with strong credit ratings tends to carry lower risk, but also offers lower returns. Conversely, investing in venture debt, which is a loan issued to early-stage startups, generates higher returns but carries a higher default risk.

We cannot cover every type of private debt in a single article. Instead, this article focuses on private debt secured by real estate because, in our experience as a private lender for over a decade, we have found that it typically offers higher risk-adjusted returns and more principal protection than most types of debt.

Throughout the article, we also review how you can invest in real estate-secured loans that we, Constitution Lending, have originated.

What is Private Real Estate Debt Investing?

Private real estate debt is a loan offered by non-bank lenders to borrowers who need capital for real estate projects, such as fix and flips and construction projects.

There are three main benefits to investing in real estate-secured private debt:

1. Private debt investors can claim the real estate if borrowers default, providing significant principal protection.
   
   
2. It has interest rates between 10% to 14%, so investors earn higher returns compared to longer-term debt.

3. Because these loans are short-term, typically lasting between 6 and 18 months, debt investors receive their principal soon after making their initial investment. They aren't locked into long-term positions.

Benefit #1: Strong Principal Protection Backed by Borrower Equity and Collateral

Private real estate debt is secured by physical real estate that investors can liquidate if the borrower defaults, allowing them to use the sale proceeds to recover their principal and interest payments.

For additional principal protection, high-quality real estate debt is secured by collateral worth substantially more than the loan amount. This means that if the collateral loses value, such as in a market downturn, investors can still recover their principal, with the borrower’s equity investment absorbing the loss.

For example, if debt investors lend $750K, which is used to purchase a $1MM property, and the property’s value falls to $750K, investors can still recoup their entire principal investment. The borrower’s $250K equity cushions the loss.

Corporate debt and many other investment vehicles don't offer the same principal protection, as they’re typically not secured by a stable asset. Even if a loan is secured by a company’s equipment, inventory, IP, and other assets, they usually depreciate over time and are difficult to evaluate and sell easily.

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

Benefit #2: Investors Can Earn Between 10% and 14% Annually

Interest rates on short-term hard money loans currently range from 10% to 14%, offering a premium over traditional fixed-income investments. Borrowers make monthly interest payments over the six to 18-month loan term, enabling investors to earn higher yields compared to other types of debt.

Borrowers are fine paying a higher interest rate than bank loans for two reasons:

1. Traditional banks don’t offer short-term hard money loans, so the only way to finance their real estate projects is to partner with a private lender.

2. Private lenders like Constitution Lending can close loans within 7 to 14 days. When borrowers compete with cash buyers for undervalued properties, they need funds quickly. They're often willing to pay higher rates and secure the deal rather than risk losing it while negotiating for lower rates.

Benefit #3: Investors Receive Their Principal Within 6 to 18 Months

Most types of private debt, including corporate and venture debt, have long terms, ranging from five to 10 years. As a debt investor, your money remains tied up until the loan term ends, and withdrawing it early often comes with penalties.

However, because hard money loans are short-term, you can recoup your principal fairly quickly, usually within 6 to 18 months. You can reinvest more frequently without being locked into illiquid investments. You have the flexibility to invest in new loans, explore other investment opportunities, or cover personal expenses.

Risks to Consider with Real Estate Debt Investing

The risk with investing in real estate-secured debt is that if the value of the collateral falls below the amount owed and the borrower defaults, investors will have difficulty liquidating the collateral and recovering their full principal.

For this reason, we advise investing in debt secured by property worth more than the loan amount. This is measured by the LTV or loan-to-value ratio, a percentage that expresses the loan amount to the collateral’s value. For example, a $750K loan secured by a $1MM property has an LTV of 75%.

Low LTV loans provide investors with an equity cushion against market volatility. Staying with the example above, if the property’s value drops from $1MM to $750K and the borrower stops paying, investors can still recover their full principal through liquidation.

With Constitution Lending, we only originate loans with an LTV of 75% or less, which is a key reason why our investors have never experienced a principal loss.

How to Start Investing in Private Debt Secured by Real Estate

There are three ways to start investing in private real estate debt:

1. Invest fractionally with a private lender: Fractional investing is the most accessible way for individual investors to get started in real estate debt. Instead of originating loans yourself, which requires $300K to $500K in most cities, you simply purchase shares in loans already originated by a lender. With Constitution Lending, you can start with as little as $1,000.

2. Lend directly to borrowers: For institutional investors with access to high-quality borrowers, the expertise to source and manage loans, and the capital to fund entire deals, direct lending can be a viable option.

3. Invest with a real estate debt fund: To make private debt more accessible to individual lenders, many private debt funds have emerged, offering investors the opportunity to invest in a pool of real estate-backed loans. While this approach requires less capital than direct lending, it’s still expensive, as most funds have a minimum investment of around $100K.

Here’s why most individual investors choose to invest fractionally with a private lender, rather than originate their own loans or invest through a fund.

Lower Starting Investment

One of the main limitations of direct lending is the sheer amount of private capital required.

For example, originating a 60% LTV loan to a borrower purchasing a $1MM property would require $600K upfront. Most individual investors don’t have access to this kind of capital.

Investing fractionally with a private lender significantly reduces the amount of capital you need to start investing. With Constitution Lending, you can invest with as little as $1,000.

Less Manual Work

Another limitation with direct lending is that you must originate loans yourself. This usually involves finding high-quality borrowers to lend to, underwriting their paperwork to assess risk, negotiating terms, and servicing the loan.

However, when you invest fractionally with Constitution Lending, it’s much more passive because you don’t have to do any of this. You tap into our loan sourcing, underwriting, and origination experience; you simply collect monthly interest payments from the borrower.

More Diversification

Because direct lending is so expensive, many investors struggle to diversify across multiple loans, borrower profiles, locations, and risk levels. As a result, a significant portion of their portfolio often ends up concentrated in a single loan.

However, because Constitution Lending only requires a minimum investment of $1,000, investors can easily diversify their portfolios by placing smaller amounts into different investment-grade loans across the country. They don’t need to make a large allocation of their portfolio to a single loan.

How to Invest in Constitution Lending Real Estate-Secured Loans

Getting started with private mortgage note investing through Constitution Lending takes less than five minutes.

1. Begin by setting up your investor account and linking it to your preferred funding source; this could be a bank account, retirement account, or a self-directed IRA. Once that’s done, you’ll be taken to your investor dashboard through our notes platform.

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2. On the Available Investments page, you’ll be able to browse assets under management (AUM). Each listing includes key details like loan-to-value (LTV) ratio, risk grade, floating rate, expected cash flow, and loan term.

3. Clicking on an individual note will bring up a more detailed view. This includes the borrower’s credit profile and payment history, the lien’s seniority, the budget for renovations, current property value, special situations, and the projected value after improvements.

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4. When you're ready to invest, simply select “Fund this Loan” and enter the investment amount you’d like to commit.

5. Interest payments from the borrower are deposited into your Constitution Lending wallet on the first day of each month. You can choose to withdraw these funds or roll them into additional investment opportunities.

6. Your Investor Dashboard, accessible from the sidebar, provides a real-time overview of your portfolio — including active loans and the returns they’re generating.

7. Once the loan reaches maturity, your original investment (principal) is returned to you.

Due Diligence Investment Strategies to Help You Invest in High-Quality Debt

Here are six questions to ask that will help you identify high-quality real estate debt:

1. What is the LTV on the loan? The number one factor determining the quality of a loan is its LTV. We recommend investing in low LTV loans (below 75%) because it means the collateral can lose up to 25% of its value, and investors can still liquidate it and recover their principal.
   
   
2. What is the lender’s default rate? If you’re investing fractionally through a lender, ask about the lender’s default rate. The default rate is the percentage of borrowers who stop making payments and is a key indicator of borrower quality. Look for lenders with a default rate under 4% as that’s the U.S. average. At Constitution Lending, our default rate is under 2%.

3. Does the lender invest in the same loans as you? Another way to gauge a lender’s loan quality is to check if they have originated the loan with their own capital and hold a significant stake in it. This creates a shared incentive structure as both parties benefit when the loan performs. With many marketplaces, they simply connect loan sellers and buyers, so they earn commissions and are incentivized to push any loan your way.

4. Are there any provisions in place protecting investors from missed payments? Constitution Lending is the only lender that has a payment guarantee on all loans. This means that if borrowers default, we will step in and pay you interest payments for up to 6 months.
   
   
5. Where do you sit in the capital structure? The capital structure refers to the order in which debtors are paid if the borrower defaults and the collateral is used to settle debts. First-lien investors, i.e., investors in the primary loan, are paid first and in full, then subordinate debt investors, and borrowers receive whatever is left over. We recommend investing in first-lien loans because you get paid first.
   
   
6. What is the interest rate? Consider the loan’s interest rate as well as the repayment schedule and fees, as these determine your returns and cash flow frequency. At Constitution Lending, our hard money loans have interest rates between 10% and 14% and interest payments are made monthly.

Get Started

To date, Constitution Lending has originated over $200 million in private debt, and due to the quality of our loans, our investors have never seen a loss of principal.

Sign up for an investor’s account to learn more about our debt investment opportunities.

Alternative Types of Private Debt

Corporate Debt

Corporate debt involves loans made directly to private or mid-sized companies, often to support expansions, mergers, acquisitions, or refinancing needs. 

These leveraged loans are commonly structured as senior secured, unitranche, or mezzanine debt, depending on the risk and return profile. Investors benefit from predictable interest payments and access to middle-market credit opportunities not available in public markets. 

However, the borrower’s financial performance and industry conditions heavily influence outcomes, and in many cases, corporate loans are not backed by physical collateral.

Compared to real estate debt investing, corporate debt can carry more credit risk due to its reliance on company cash flows rather than hard assets. 

Real estate loans are typically secured by tangible properties, which offer greater protection in the event of default. For investors prioritizing capital preservation and collateral-backed structures, real estate debt may present a more secure option within private debt markets.

Distressed Debt

Distressed debt is an asset class where fund managers focus on acquiring debt from companies in financial distress, often on the brink of bankruptcy, at steep discounts to face value. 

Investors profit if the business recovers, restructures successfully, or is liquidated for more than the purchase price. Distressed debt investment strategies demand deep credit expertise, legal knowledge, and patience, as recoveries can take years.

In contrast, real estate debt investing is typically based on performing loans secured by income-producing or development-stage properties. Even in underperforming scenarios, lenders can often recover funds through foreclosure or asset disposition. 

Unlike distressed debt, where repayment hinges on business recovery, real estate debt offers the security of tangible collateral. For investors seeking a balance of yield and principal protection, real estate debt may offer a more stable entry point into private credit.

Venture Debt

Venture debt is a form of private credit that provides growth capital to venture-backed startups. 

Unlike private equity financing or venture capital, venture debt does not dilute ownership and is often structured as term loans with warrants attached. These loans are usually offered to early-stage companies with limited cash flows but strong investor backing. Returns can be attractive, blending interest income with potential equity upside through warrant participation. However, the risk of default is considerable given the volatile nature of startups.

By contrast, real estate debt investing provides exposure to loans secured by physical property, offering a more stable and collateral-backed income stream. Investors focused on capital preservation, consistent yield, and secured structures may find real estate debt a more predictable private debt investing strategy.

Specialty Finance or Alternative Asset Lending

Specialty finance and consumer lending are growing segments within private credit markets, offering high-yield opportunities by targeting niche borrower markets. 

These loans are typically extended to individuals or small businesses through non-bank lenders and fintech providers, often for purposes like education, healthcare, point-of-sale purchases, or short-term working capital. 

Investors benefit from short loan durations, strong demand, and attractive risk-adjusted returns, especially when loans are pooled into structured products or funds. However, these alternative investments carry higher risk, as consumer repayment behavior can be volatile.

Additionally, consumer and specialty finance loans are usually unsecured or lightly collateralized. This lack of asset backing means recoveries in the event of default are more difficult.

Mezzanine Debt

Mezzanine debt occupies a middle ground in private debt investing, between senior secured loans and equity. It’s typically used by companies to fund acquisitions, growth, or recapitalizations.

Mezzanine debt offers higher yields than senior debt because it is subordinated in the capital structure. These loans often include equity kickers or warrants, giving investors a share in the upside if the company performs well. Mezzanine lenders accept more credit risk than senior lenders in exchange for these returns, but their position below senior creditors exposes them in the event of a default.

In contrast to real estate debt investing, mezzanine loans are usually unsecured or only second-lien, with repayment depending on company cash flows rather than physical collateral.

Start Investing in Real Estate-secured Debt with Constitution Lending

You can sign up for an investor’s account and start investing in high-quality private debt with as little as $1,000.