What Makes a Debt Fund Reliable? Questions to Ask Before Investing

Private debt funds can be a great way to earn steady, passive income, but let’s be real—not all of them are worth your time or money. Some are run by seasoned professionals who know how to protect investor capital and deliver consistent returns. Others? They’re a gamble, full of hidden risks and questionable management.

So, how do you tell the difference between a well-managed, reliable debt fund and one that’s all smoke and mirrors? You ask the right questions. Here’s what you need to look for before investing.

1. Does the Fund Have a Proven Track Record?

If a debt fund has been around for years and has successfully weathered different market conditions, that’s a good sign. If they’re new or their performance has been shaky, proceed with caution.

What to Ask:

✔ How long has the fund been in business? Experience matters.
✔ What kind of returns has it delivered over the years?
✔ How did the fund perform during downturns? If they weren’t around when the market crashed, they haven’t been tested.
✔ How much capital have they deployed, and what’s their default rate?

🔹 Red Flag: If the fund is brand new, has a vague history, or dodges questions about past performance, that’s a no-go.

2. What Safeguards Are in Place to Protect Investors?

Even the best funds will deal with defaults now and then. The key is how well they manage risk and protect investor capital when things go sideways.

What to Ask:

✔ Are loans secured by real estate? If not, that’s a huge red flag.
✔ What’s the loan-to-value (LTV) ratio? The lower, the better—it means there’s more equity protecting your investment.
✔ What happens if a borrower defaults? Who handles the foreclosure process?
✔ Does the fund hold first lien positions? (This ensures investors get paid first if things go south.)

🔹 Red Flag: If they can’t clearly explain their risk management strategy, run the other way.

3. Is the Fund Transparent About Its Operations?

If a fund isn’t open about its operations, fees, or performance, that’s a dealbreaker. You should always know where your money is going.

What to Ask:

✔ How often do investors receive performance updates?
✔ Can I see past investor reports? If they hesitate, that’s a red flag.
✔ What’s the communication plan if market conditions change?
✔ Are all fees and expenses clearly disclosed?

🔹 Red Flag: If you feel like you’re being kept in the dark, that’s a sign to walk away.

4. Who’s Running the Fund?

A fund is only as good as its management team. You want people with deep experience in real estate lending and a track record of success—not someone experimenting with other people’s money.

What to Ask:

✔ What’s the background of the fund managers? Have they successfully managed real estate lending before?
✔ Have they been through market downturns and still delivered for investors?
✔ Do they invest their own money in the fund? If they don’t believe in it, why should you?

🔹 Red Flag: If the team is inexperienced or avoids answering these questions, you should be skeptical.

5. What Are the Liquidity Terms?

Not all debt funds offer the same level of liquidity. Some lock up your money for years, while others offer shorter-term flexibility. Make sure you’re comfortable with the terms.

What to Ask:

✔ What’s the minimum investment?
✔ How long is the lock-up period?
✔ Can you withdraw early, and if so, what are the penalties?
✔ Does the fund pay out quarterly or annually?

🔹 Red Flag: If the fund’s liquidity rules are too strict or unclear, be cautious.

6. What Type of Loans Does the Fund Invest In?

Different funds focus on different types of loans. Some go for low-risk, short-term real estate loans, while others take bigger risks with riskier projects.

What to Ask:

✔ What kind of real estate does the fund lend on—residential, commercial, development?
✔ What’s the average loan term?
✔ Is the focus on stable, income-generating loans or high-risk projects?

🔹 Red Flag: If the fund is chasing risky investments without a clear risk management plan, that’s a problem.

7. How Does the Fund Handle Market Downturns?

Real estate goes through cycles, and a solid debt fund should have a game plan for economic downturns.

What to Ask:

✔ How did the fund perform during past market downturns?
✔ What adjustments does management make in tough times?
✔ What’s the strategy if foreclosure rates rise?
✔ Does the fund adjust interest rates to keep up with inflation?

🔹 Red Flag: If the fund has never been tested in a bad market, that’s something to think about.

Do Your Homework Before You Invest

A good debt fund should provide consistent, secured returns without unnecessary risks. But not all funds live up to that promise. Asking the right questions before investing can help you avoid mistakes and ensure your money is working for you.

At LBC Capital Income Fund, LLC, we believe in full transparency, smart risk management, and a hands-on approach to helping investors earn steady, secured returns. Our fund is built for those who want passive income backed by real estate—without the headaches of direct ownership.

Thinking about investing in a debt fund? Contact LBC Capital Income Fund, LLC today to learn more about how we protect investors and deliver reliable returns.