Top 5 Mistakes to Avoid in Trust Deed Investing

Trust deed investing can be a solid way to earn real estate–backed income without owning or managing property. But like anything in private markets, the results tend to separate investors who treat it like a “real underwriting decision” from those who treat it like a high-yield savings account.

The good news is you don’t have to learn everything the hard way. A lot of the risk in trust deed investing comes from a handful of common mistakes — and once you know what they are, they’re very avoidable.

Mistake #1: Skipping real due diligence on the property and borrower

This is the big one. Trust deed investing is often marketed as “asset-backed,” and that’s true — but only if the asset is valued correctly and the borrower’s plan is realistic.

What this mistake looks like:

• You rely on a quick valuation (or an outdated one)
• You don’t understand the borrower’s exit plan (sale, refinance, or cash flow)
• You assume “real estate always goes up,” so the collateral will save you

Why it’s a problem:
If the borrower runs into trouble, the collateral is your safety net. If that safety net was overstated (or hard to liquidate), recovery gets messy. Even when principal is ultimately protected, time and costs can eat into returns.

How to avoid it:

• Verify the valuation method. Is it based on a recent appraisal, broker price opinion (BPO), or comps? How conservative is it?
• Ask about the exit strategy. How does the borrower realistically repay? What happens if plan A fails?
• Look at borrower track record. Not just credit score — experience with similar projects matters.

A good manager (or fund) will have a repeatable underwriting process and be willing to explain it in plain English.

Mistake #2: Treating LTV like a “nice-to-have” instead of the main risk control

If you invest in trust deeds long enough, you’ll hear people talk about interest rate like it’s the headline. In practice, the loan-to-value (LTV) is what often decides whether a loan is forgiving when things go sideways.

What this mistake looks like:

• You accept high LTV because the interest rate looks attractive
• You don’t understand whether the LTV is based on “as-is” value or “after-repair value”
• You don’t ask how the lender handles changing market conditions

Why it’s a problem:
A higher LTV means less cushion. If the market softens, or the asset takes longer to sell, the lender has less room to maneuver without impairing principal.

How to avoid it:

• Prefer conservative LTVs (many experienced lenders aim for meaningful equity cushion).
• Know what the value is based on (as-is vs. after-repair value).
• Ask how the lender prices risk when markets shift. Conservative underwriting usually gets more conservative during uncertain periods — and that’s not a bad thing.

If you remember only one thing: in trust deed investing, yield is the reward — LTV is the protection.

Mistake #3: Not diversifying across loans (or relying on “one great deal”)

A single trust deed can look perfect on paper. Great property. Strong borrower. Clean documentation. And sometimes it works exactly as planned.

But concentrating too much capital into one loan increases your exposure to the one thing nobody can control: surprise.

What this mistake looks like:

• One loan is a huge percentage of your trust deed allocation
• You invest based on the story, not on portfolio logic
• You assume “it’s secured by real estate, so it’s fine”

Why it’s a problem:
Even solid loans can hit delays: permits, contractor issues, market liquidity, borrower execution, title surprises. Concentration turns ordinary bumps into portfolio-level problems.

How to avoid it:

• Diversify across multiple loans (different borrowers, different property types, different locations).
• If you prefer passive investing, consider a pooled approach where a manager diversifies across a portfolio of loans (this is one reason some accredited investors work with funds like LBC Capital Income Fund, LLC, where diversification and servicing are handled professionally).

Diversification isn’t exciting. But in private lending, boring is often the point.

Mistake #4: Underestimating timelines and extension risk

Trust deed investing is often marketed as short-term: 6 months, 12 months, 18 months. That’s usually the plan — but real estate doesn’t always follow the calendar.

What this mistake looks like:

• You assume every loan will repay exactly at maturity
• You don’t read extension language (or fees)
• You don’t think about what a delay means for your liquidity needs

Why it’s a problem:
Extensions aren’t automatically bad — a well-structured extension can still pay interest and preserve principal — but they can affect your ability to reallocate capital when you want to.

How to avoid it:

• Review extension terms before investing: how long, what fees, what rate changes (if any)?
• Ask how extensions are handled in practice, not just on paper.
• Match liquidity to reality. Don’t invest capital you may need on a strict timeline.

A good mindset is: treat the term as an estimate, and the structure as the actual protection.

Mistake #5: Not paying attention to servicing, enforcement, and “what happens in a default”

This one is less glamorous, but it matters. A trust deed investment is only as strong as the lender’s ability to service the loan properly and act quickly when something breaks.

What this mistake looks like:

• You don’t ask who services the loan
• You don’t understand the default and foreclosure process
• You assume “collateral = automatic safety”

Why it’s a problem:
Collateral does not manage itself. If the borrower misses payments, the lender has to pursue remedies. That requires a real process, good documentation, and the willingness to enforce terms.

How to avoid it:

• Ask:
  • Who services the loans?
  • How are late payments handled?
  • What’s the historical default/workout experience?
  • How does the manager communicate during issues?
• Prefer managers who treat servicing as part of the product, not an afterthought.

In trust deed investing, underwriting gets you into the deal. Servicing gets you out safely.

Wrap-up: Trust deed investing rewards disciplined behavior

Trust deed investing can be a strong income tool for real estate investors — especially accredited investors looking for passive yield backed by tangible collateral. But it’s not “set it and forget it.” The best outcomes tend to come from a few consistent habits:

• Do real due diligence
• Take LTV seriously
• Diversify like it matters (because it does)
• Assume timelines may shift
• Invest with servicing and enforcement in mind

Avoiding these mistakes won’t eliminate risk — nothing will — but it will dramatically improve the stability of your results over time. Feel free to talk to our fund manager to ask any questions about LBC Capital Income Fund, LLC and what we do.