Understanding Risk Tiers in Trust Deed Investing

Why Risk Tiers Matter in Trust Deed Investing

One of the most frequent questions investors first ask when researching trust deeds is: How much risk am I taking on? Unlike direct real estate investment, trust deeds present a very straightforward risk-reward profile as defined by a loan’s position and borrower profile.

Understanding the risk tiers within trust deed investing will go a long way toward arming investors for smart decision-making, thereby maximizing their returns while protecting their capital.

Let’s break down what risk tiers mean, how they could affect your investment, and what strategies can help balance risk and reward.

Breaking Down Risk Tiers in Trust Deeds

Risk in trust deed investments is not one-size-fits-all. The loans themselves are different in nature and character, sometimes having very different risks associated with them, depending on such factors as loan-to-value, borrower creditworthiness, and property type.

1. Low-Risk Trust Deeds (First Position, Low LTV, Strong Borrower)
   First-position loans have the highest priority upon default, meaning if the borrower defaults, first-position lenders get paid first when the property is sold.
   ✅ LTV below 60%: The lower the LTV, the more equity would have been built into the loan, therefore less risk in case of loss.
   ✅ Strong borrower profile: The risk goes further down where there is good credit, solid repayment history, and a clear exit strategy on the part of the borrower.

Best for: Investors looking for stable, lower-risk income with regular monthly interest payments.

2. Medium-Risk Trust Deeds (First Position, Moderate LTV, Experienced Borrower)
   ✅ LTV between 60-75%: There’s still equity in the deal, but it’s a bit riskier than a low-LTV loan.
   ✅ Experienced borrower: A borrower with experience in successful fix-and-flips or commercial deals reduces uncertainty.
   ✅ Shorter loan terms: Many medium-risk loans are 6-12 months, allowing investors to cycle capital faster.

Best for: Investors comfortable with slightly higher risk for better returns, while still maintaining collateral protection.

3. High-Risk Trust Deeds (Second Position, High LTV, Riskier Borrower)
   ⚠️ Second-position loans: These lenders only get paid after the first-position lender in a foreclosure.
   ⚠️ LTV above 75%: Higher leverage means less protective equity, increasing risk if property values drop.
   ⚠️ Weaker borrower profile: Some loans cater to borrowers with less experience or credit challenges, making repayment less certain.

Best for: Investors seeking higher returns and willing to take on more risk.

How Risk Tiers Impact Returns

The best thing about investing in trust deeds is the potential to adjust your risk to your goals.

• Low-risk loans may yield 6-8% a year but with higher security.
• Medium-risk loans may yield 8-10% annually, balancing strongly attractive returns with manageable risk.
• High-risk loans may provide 12%+ returns, but at the cost of preparedness on the investor’s part for loss or delay.
  By understanding these risk tiers, investors can build a portfolio that aligns with their financial goals and risk tolerance.

Key Factors That Influence Trust Deed Risk

In addition to risk tiers, there are several external factors that may impact the security and profitability of a trust deed investment:

1. Loan-to-Value (LTV) Ratio
   LTV is one of the most important risk indicators. A lower LTV provides more equity cushion in case of default, which reduces the lender’s exposure.

50-60% LTV = Lower risk, lower returns
60-75% LTV = Balanced risk and return
75%+ LTV = Higher risk, higher returns

2. Property Type
   Single-family homes tend to be less risky than commercial or land development deals.
   Multi-unit and mixed-use properties may carry higher income potential but require stronger underwriting.
3. Borrower Strength
   A borrower’s credit, experience, and repayment history all factor into a loan’s risk tier.

Seasoned investors with a track record of successful projects reduce risk. Newer investors or those with credit challenges increase risk.

4. Market Conditions
   A strong housing market means properties sell faster, reducing default risk.
   Market downturns increase the likelihood of foreclosure, raising risk.
   Understanding these factors helps investors make informed decisions when selecting trust deed opportunities.

How to Build a Risk-Adjusted Trust Deed Portfolio

For investors looking to maximize returns while managing risk, diversification is key.

✅ Invest in a mix of low, medium, and high-risk trust deeds to balance the security-income scale. First-position loans provide a higher level of protection against default.

✅ Make sure to work with trust deed funds that conduct good underwriting regarding borrower experience, credit, and property value.
✅ Monitor the market trends: Changes in economics will affect property values, thus protecting your investment by being knowledgeable of the happenings around you.

Why Do Business with a Trust Deed Fund Such As LBC Capital Income Fund, LLC?

The management of risk associated with trust deed investing requires both experience and skillful underwriting. Rather than analyzing individual transactions, investors have the advantage of a professionally managed trust deed fund such as LBC Capital Income Fund, LLC.

✅ Natural diversification: A fund disperses capital among numerous loans to decrease single loan risk.
✅ Expert Risk Assessment: There’s professional underwriting to vet borrowers and properties.
✅ Consistent Passive Income: The investors get to enjoy monthly interest payments without burdening themselves with loan management.

How to Find the Right Level of Risk for You?

Trust deed investing is not one-size-fits-all. It could be either lower-risk, steady returns or higher-yield opportunities. Understanding risk tiers allows you to understand which investments will meet your goals.

For accredited investors looking to earn passive income with real estate-backed security, trust deed investments provide an attractive alternative to traditional markets.

LBC Capital Income Fund, LLC offers professionally managed trust deed funds designed for long-term stability and growth. If you’re ready to explore trust deed investing, let’s start a conversation.