No appreciation story, no value-add narrative, not even cocktail-party bragging rights.
A secured note doesn’t promise to 3x your money. It promises to pay you. On a schedule. At a fixed rate. Backed by a lien on a real piece of property.
For investors who have been chasing yield in a market where promises are easy and delivery is hard, that might actually be the most attractive thing they’ve heard in a while.
Here’s what secured notes are, how they work, and why they belong in more passive real estate portfolios than they currently occupy.
When a real estate operator needs to borrow money… to acquire a property, fund renovations, or bridge to longer-term financing… they have options. Banks are one. Private lenders are another.
A secured note is a loan you make to a real estate operator or investor, backed by a lien on real property. You’re the lender. They’re the borrower. They pay you a fixed interest rate on a set schedule, and your loan is secured by an interest in whatever property they’ve pledged as collateral.
The key word is secured. Your investment isn’t backed by a promise or a handshake or a business plan. It’s backed by a legal interest in a physical asset. If the borrower defaults, you have a path to recovery through foreclosure on that property.
That’s meaningfully different from unsecured lending, and it’s meaningfully different from equity investing where your returns depend on a property performing according to plan.
First Position vs. Second Position
Not all notes carry the same risk. The most important variable is where your lien sits in the capital stack.
A first-position note means you’re first in line if something goes wrong. If the borrower defaults and the property gets foreclosed, you get paid before anyone else. Equity investors, other lenders, everyone. First position is the safest place to be in a secured lending scenario.
A second-position note means there’s another lender ahead of you. If the property sells in foreclosure, the first-position lender gets made whole first. You get whatever is left. In a scenario where the property has lost significant value, second-position lenders can end up with less than they’re owed, sometimes much less.
When we evaluate notes in the club, we strongly prefer first-position liens. The yield is typically lower than what second-position notes offer, but the protection is substantially better. In our view, chasing an extra two or three percentage points by taking a subordinate position is rarely worth the additional risk.
Loan-to-Value: The Number That Matters Most
The second critical variable is loan-to-value ratio, or LTV. This is the loan amount expressed as a percentage of the property’s value.
A note at 60% LTV means you’ve lent $600,000 against a property worth $1 million. If the borrower defaults and the property has to be sold quickly… even at a discount… there’s a meaningful buffer before you start losing principal. The property would have to lose more than 40% of its value for you to be underwater, and that’s before you’ve even started a foreclosure process.
A note at 85% LTV is a different story. The margin for error is thin. Property values don’t have to fall much before you’re at risk.
We generally look for notes in the 60-70% LTV range for first-position loans. It’s not the highest-yielding segment of the note market, but it’s the one where you can genuinely sleep at night knowing the collateral covers your exposure.
What Happens When a Borrower Defaults
It’s worth being clear-eyed about this, because some investors treat the foreclosure path as a theoretical comfort and never think about it practically.
If a borrower stops paying on a secured note, you don’t just lose your money and move on. You have legal remedies. As a lienholder, you can initiate foreclosure proceedings against the property. The specifics vary by state and loan structure, but the general mechanism is: you take the property, sell it, and recover your principal from the proceeds.
This process takes time. It involves legal fees. It’s not painless. But it is a real protection that unsecured creditors and equity investors don’t have.
The practical implication: your due diligence on the collateral matters. You want to understand what the property is worth independently of what the borrower says it’s worth. A recent appraisal from a qualified third party is the baseline. You also want to understand the local real estate market well enough to know whether that value is stable, rising, or at risk.
What Secured Notes Pay
Yields on first-position secured notes have ranged considerably depending on the market environment, the borrower’s creditworthiness, the LTV, and the property type. In the current rate environment, well-structured first-position notes have been offering anywhere from 8% to 12% annually, sometimes more for shorter-duration bridge scenarios.
Those aren’t projections tied to a business plan working out. They’re contractual. The rate is set at origination. The payment schedule is fixed. You know what you’re getting before you wire a cent.
That predictability is what makes notes attractive as part of a broader passive real estate portfolio. Equity investments offer the potential for meaningful upside… appreciation, profit on sale… but those returns aren’t guaranteed and depend on a lot of variables going according to plan. Notes give you a fixed return that doesn’t fluctuate with the real estate market.
The downside is the flip side of that same coin. You don’t participate in appreciation. If the property doubles in value over five years, you still collect your fixed rate and nothing more. The upside belongs to the equity holders.
For investors who are primarily seeking income rather than appreciation… particularly those closer to or in retirement, or those building a cash flow base to live on… that trade-off is often a good one.