How Interest Rate Changes Impact Trust Deed Investments

Trust deed investments offer a way for accredited investors to earn consistent returns backed by real estate. Unlike stocks or bonds, these investments are tied to hard assets, providing a layer of security. But like all fixed-income investments, interest rate changes impact returns, risk levels, and investor strategies.

For those looking at trust deed funds like LBC Capital Income Fund, LLC, understanding how interest rate shifts affect real estate-backed lending is key to making the right investment moves. Let’s break down what happens when rates rise or fall and how investors can adjust their strategies to stay ahead.

How Rising Interest Rates Affect Trust Deed Investments

When interest rates increase, borrowing costs rise across all types of loans—including hard money lending and trust deed-backed investments. This has several direct effects:

1. Higher Borrowing Costs for Real Estate Investors

Real estate developers and fix-and-flip investors rely on short-term financing, often through hard money loans. When rates rise:

• Monthly payments increase, making financing more expensive.
• Investors may hesitate to borrow, slowing down real estate transactions.
• Some projects may no longer be profitable due to higher carrying costs.

For trust deed investors, higher borrowing costs can be a double-edged sword—it can slow loan demand, but it also increases the potential yield on new trust deed investments.

2. Higher Yields for New Trust Deeds

As rates rise, trust deed lenders must offer higher interest rates to stay competitive with other fixed-income investments. For investors, this means:

• New trust deeds may yield 9-12% instead of 7-9%.
• Short-term deals may offer better returns than long-term fixed-income assets.
• Reinvestment opportunities improve as older, lower-yielding notes mature.

LBC Capital Income Fund, LLC adjusts rates based on market conditions, ensuring investors earn competitive returns even as rates fluctuate.

3. Lower Prepayment Risks

When interest rates are low, borrowers refinance frequently to secure better terms. But when rates rise, fewer borrowers pay off loans early since refinancing would cost more.

For trust deed investors, this means:

• More predictable income streams since borrowers stick with their existing loans.
• Less reinvestment risk, as loans are held to term rather than refinanced.

This creates stability for those looking for consistent cash flow from trust deed funds.

How Falling Interest Rates Affect Trust Deed Investments

When interest rates drop, real estate investors see lower borrowing costs, leading to increased demand for loans. However, this also impacts trust deed investors in a few key ways.

1. More Real Estate Activity & Loan Demand

Lower interest rates make financing cheaper, leading to:

• More fix-and-flip projects as investors take advantage of lower borrowing costs.
• Increased property acquisitions, especially in competitive markets.
• Higher demand for hard money loans as more borrowers seek fast funding.

For trust deed investors, this means a strong pipeline of lending opportunities.

2. Lower Yields on New Trust Deeds

When rates fall, lenders adjust pricing to remain competitive. This results in:

• Newly issued trust deeds yielding less than before.
• More demand from investors looking for secure fixed-income alternatives.
• The need for portfolio rebalancing to maintain desired return levels.

While falling rates may slightly reduce new investment yields, trust deed funds still outperform traditional fixed-income options like bonds or savings accounts.

3. Increased Prepayment Risks

Lower rates often lead to borrowers refinancing into cheaper loans, which means:

• More early payoffs on existing trust deeds.
• Reinvestment risk, as investors must find new opportunities at lower yields.
• Potential short-term disruptions in monthly income streams.

LBC Capital Income Fund, LLC mitigates this by ensuring a diversified mix of short- and medium-term loans, reducing concentration risk.

Adapting Investment Strategies to Interest Rate Changes

For accredited investors, knowing how to adjust strategy based on interest rate movements can help maximize returns.

1. Focus on Shorter Terms in Rising Rate Environments

When rates are increasing:

• Prioritize short-term trust deed investments (12-24 months) to capture rising yields.
• Avoid locking in long-term, lower-rate deals if rates are expected to climb.
• Look for high-demand asset classes (like multifamily or commercial properties) to ensure stable loan performance.

2. Lock in Long-Term Deals in Falling Rate Environments

When rates are dropping:

• Consider longer-term trust deeds to secure a fixed return before rates decrease further.
• Diversify across multiple loans to minimize prepayment disruptions.
• Work with trust deed funds that actively manage portfolios to adjust for rate trends.

3. Balance Risk & Reward with a Trust Deed Fund

Investing in individual trust deeds can mean managing reinvestment risk and market changes yourself. A trust deed fund, like LBC Capital Income Fund, LLC, handles these complexities:

• Diversified portfolios protect against rate volatility.
• Active fund management ensures investors benefit from changing market conditions.
• Consistent income streams reduce the need for constant deal sourcing.

Making Interest Rate Changes Work for You

Interest rate shifts affect every type of fixed-income investment, and trust deed investments are no exception. Understanding these impacts helps investors make better decisions—whether locking in higher rates during market peaks or securing stable returns when rates drop.

At LBC Capital Income Fund, LLC, we manage trust deed investments in a way that adapts to changing markets, ensuring our investors receive strong, reliable returns regardless of interest rate trends.

For those looking to grow their portfolios while managing risk, trust deed investments remain an attractive option—whether rates are rising or falling. Book your call to learn more.