Trust Deed Investing 101: What It Is and How It Works

Most investors understand real estate. Some own rental properties. Others hold REITs. But fewer are familiar with a quieter corner of real estate finance that has been around for decades, especially in California — trust deed investing.

At its core, trust deed investing allows you to act as the lender rather than the property owner. Instead of buying a building and managing tenants, you finance a real estate loan secured by property and earn interest on that loan. It’s a way to participate in real estate income without becoming a landlord, and it’s one of the reasons private real estate lending has remained attractive to accredited investors across the U.S.

Let’s walk through how it actually works, why many investors like it, and what to watch for along the way.

What is trust deed investing?

In simple terms, trust deed investing means providing a loan secured by real estate, where the loan is recorded using a deed of trust rather than a traditional mortgage. This structure is common in many U.S. states, especially California, Nevada, Arizona, and parts of the West.

As an investor, you supply capital that is lent to a borrower. The borrower uses the funds to purchase, refinance, or improve a property. In return, you receive interest payments over the life of the loan. If the borrower fails to repay, the property serves as collateral.

So instead of owning the property, you own the note secured by the property.

That distinction matters. Property ownership comes with operational headaches — vacancies, repairs, taxes, insurance, tenants. Trust deed investing focuses on income generation, secured by the property, without direct ownership responsibilities.

How trust deed investing functions

There are three key parties in a trust deed structure:

The borrower – Typically a real estate investor, developer, or property owner seeking financing.

The investor (lender) – You, or a fund pooling multiple investors’ capital, providing the loan.

The trustee – A neutral third party that holds legal title to the property in trust until the loan is repaid.

The process usually works like this:

1. A borrower identifies a property opportunity and applies for a loan.
2. A private lender or fund underwrites the deal, assessing property value, borrower experience, and exit plan.
3. The loan is issued, and a deed of trust is recorded against the property.
4. The borrower makes interest payments over a defined term.
5. At maturity, the borrower refinances or sells the property to repay the loan.

If the borrower defaults, the trustee can initiate foreclosure, allowing the lender to recover capital from the underlying property.

This is why trust deed investing is considered asset-backed lending — your investment is tied to real, tangible collateral.

Why investors are drawn to trust deed investments

Many accredited investors discover trust deed investing after realizing they want real estate exposure — but not real estate management.

Here are the main reasons it appeals to investors:

• Passive income – Interest payments provide steady income without managing properties.
• Real estate collateral – Loans are secured by physical assets, not just credit promises.
• Defined returns – Interest rates are set upfront, often higher than traditional fixed income.
• Shorter durations – Many trust deed loans run 6–36 months, allowing capital recycling.
• Lower correlation to stock markets – Returns are driven by loan performance, not market sentiment.

In California especially, trust deed investing has long been part of the private lending ecosystem because traditional banks often avoid short-term or transitional real estate loans. Private lenders fill that gap.

How funds make trust deed investing easier

Historically, investors funded individual loans directly. That worked, but it required hands-on due diligence, loan servicing, and legal oversight.

Today, many investors prefer trust deed funds, where a professional manager handles:

• Loan origination
• Underwriting
• Legal structuring
• Servicing and collections
• Risk management
• Reporting to investors

This allows accredited investors to access diversified trust deed portfolios without building an in-house lending operation. It also spreads risk across multiple loans instead of concentrating capital in a single borrower.

Key benefits of trust deed investing

To summarize the main advantages:

• Predictable interest income
• Security through real estate collateral
• No tenant or property management
• Short-to-mid-term investment horizons
• Potentially higher yields than bonds or savings accounts
• Portfolio diversification away from public markets

For many investors, it occupies a sweet spot between real estate equity and traditional fixed income.

Risks and considerations

No investment is risk-free. Trust deed investing is no exception. Understanding the risks is what separates thoughtful investors from speculative ones.

Real estate market risk
Property values can decline. This is why conservative loan-to-value (LTV) ratios matter. Lending at 60–70% of property value creates a cushion if markets soften.

Borrower execution risk
Borrowers must complete projects, lease properties, or sell assets to repay loans. Experienced underwriting and borrower vetting help mitigate this.

Liquidity risk
Trust deed investments are not as liquid as public stocks or bonds. Capital is tied up for the loan term.

Manager selection risk
If investing through a fund, the quality of underwriting, servicing, and risk controls is crucial. Not all managers operate with the same discipline.

Practical ways investors manage these risks:

• Diversifying across multiple loans or pooled funds
• Reviewing loan-to-value policies
• Asking about default history and foreclosure processes
• Understanding exit strategies on each loan
• Investing with managers who provide transparent reporting

Why trust deed investing remains relevant today

In today’s environment — higher interest rates, tighter bank lending, and ongoing demand for real estate financing — private lending continues to play a key role. Borrowers need flexible capital. Banks remain cautious. Trust deed lending fills the space in between.

For accredited investors, this creates ongoing opportunity to earn contractual income backed by real estate, without taking full property ownership risk.

To conclude

Trust deed investing is not a new invention. It’s a long-established real estate lending structure that has quietly delivered income to investors for decades, especially in markets like California.

At its core, the concept is simple:
You provide capital. The borrower provides property as collateral. You earn interest.

For investors looking to add real estate exposure, generate passive income, and diversify away from public markets, trust deed investments can be a practical and understandable part of a broader portfolio — provided the underwriting and risk management are sound. Talk to our fund manager to see new horizons investing can bring you.