What is my private real estate investment actually secured by?
Never assume that "real estate investment" means your money is directly secured by a particular property. Ask whether you are making a loan, buying an ownership interest, investing in a fund, or using another structure. If a loan is described as secured, ask about the collateral, your lien position, the loan-to-value methodology, title, insurance, guarantees, and exactly what happens if the borrower defaults.
“Secured by real estate” is one of the most reassuring phrases in investing and one of the most casually used. Whether it applies to your money depends on the structure.
Debt is secured. Equity is owned.
If you lend to a project, your protection is a lien: a deed of trust or mortgage recorded against the property that gives you the right to foreclose if the borrower defaults. The strength of that protection depends on:
- Lien position. A first-position lien is paid before anyone else from a foreclosure sale. A second position is paid only after the first is made whole. Ask which one you hold.
- Loan-to-value (LTV). How much is being borrowed against what the property is worth. A loan at 65% of value has a 35% cushion before the lender loses principal; at 90% the cushion is thin. Ask how “value” was determined, and whether it means today’s as-is value or a projected after-repair value. See What does loan-to-value mean?
- Title. Was a title policy issued to the lender? Are there other liens, tax debts or easements ahead of you?
- Insurance. Is the property insured, with the lender named as loss payee, so a fire does not wipe out your collateral?
- Guarantees. Did the borrower or its principals personally guarantee the loan? A guarantee is only as good as the guarantor’s assets.
If you own equity (an LLC or partnership interest, or a fund interest), you are not secured by anything. You own a slice of an entity that owns property, and you are paid after every lender. Your protection is the entity’s equity cushion and the operator’s execution, not a lien.
Questions that separate a real answer from a slogan
- Is my capital debt or equity in this structure?
- If debt: what position, what LTV, valued how, and by whom?
- Is the lien recorded in my name, in a fund’s name, or in a servicer’s name on my behalf?
- Who holds the original note and the title policy?
- Walk me through a default: who notices, who acts, how long does foreclosure take in this state, and what does it cost?
An operator who can answer these without hesitation has thought about your downside. One who steers back to the return has not.