Trust deed investing lets sophisticated capital holders earn 8-13% yields on first-position secured loans against Chicago real estate. Less liquid than bonds, less correlated than stocks, more secured than peer-to-peer lending — but the structure requires understanding lien priority, foreclosure mechanics, and proper documentation.
What is a trust deed
In Illinois, real estate is typically secured by mortgage (with deed-of-trust structure used in some states). Functionally similar — a recorded first-position lien against the property securing repayment of a loan. As a trust deed investor, you lend money secured by a recorded first-position lien.
Typical Chicago trust deed structure
Loan amount: $50K-$500K typical. Interest rate: 9-12%. Loan-to-value: 65-75% of as-is value or ARV. Term: 6-12 months. Borrower-paid origination points: 1.5-4. As the lender, you collect the interest and points; the borrower pays them.
Where the yield comes from
Borrower pays 10-13% interest plus 2-4 points origination. Your effective annualized yield as the trust deed investor runs 10-13% net of any servicing fees. Returns are interest income, taxed at ordinary rates (unless held in an IRA — see IRA real estate lending).
Risks
Borrower default is the primary risk. If the borrower stops paying, you foreclose on the property. Illinois is a judicial foreclosure state — foreclosure takes 9-18 months and incurs legal costs. The 65-75% LTV provides cushion, but distressed exits can erode returns. Proper underwriting and documentation are essential.
Common deal sources
Direct lending to investors you know. Pool-based trust deed funds (Trust Deed Capital and similar Chicago-area operators). Loan servicing companies that source and service deals while you provide capital. Joining established lending circles via Chicago REIA and BiggerPockets local networks.
Trust Deed Investing FAQ
$50K minimum for direct lending on smaller deals. Pool-based trust deed funds (where multiple investors share a single loan) sometimes accept $25-50K minimums. Larger deals require $100K+.
For direct private lending: no, but practical experience and capital reserves matter. For pool-based trust deed funds: typically yes (accredited investor status required under SEC Rule 506(c) offerings).
Direct lending typically yields 11-14% (you keep the full interest income); pool-based funds yield 8-10% (after fund management fees). Direct lending requires more work and underwriting expertise.
Interest income is taxed at ordinary rates. Points received are also ordinary income. Only capital gains rates apply to sale of property if you take ownership through foreclosure.
Yes — self-directed IRAs can hold trust deed investments. See our IRA real estate lending guide for mechanics.
Promissory note, mortgage (recorded), assignment of rents (recorded), title insurance (lender's policy), and proper insurance coverage on the property. Use a real estate attorney for documentation — DIY documentation is a common source of trouble.
Credit check, funded-deals history, current portfolio review, liquidity verification, and reference checks with prior lenders. For first-position loans secured by real estate, borrower underwriting is secondary to property underwriting — but it still matters.
Well-underwritten Chicago private money portfolios run default rates of 3-8% annually, with most defaults eventually resolved through workout or foreclosure without principal loss. Yields are calculated to cover the expected loss rate.
Educational content only. Private lending involves capital-at-risk and tax/legal complexity. Consult a licensed attorney and CPA before deploying capital.