“If you don’t learn to make money while you sleep, you will work until you die.” — Warren Buffett
Most investors chase upside and end up carrying all the risk.
There’s another lane most people ignore.
Instead of taking equity risk and hoping for a pop, you can “be the bank” and get paid first.
I’m talking about first-position real estate debt funds—boring on the surface, but beautiful when
you care about steady cash flow and capital preservation.
1. Be the Bank: Why First-Position Debt Funds Win
When you buy equity in a deal, you’re the last in line to get paid.
In a downturn, equity gets hit first.
With first-position debt, you’re at the bottom (safest) layer of the capital stack, secured by the
Property.
If the borrower stops paying, the lender can foreclose and recover principal before equity sees
anything.
That’s the hierarchy every investor should know cold.
Banks and institutional lenders literally design deals around it.
If you need a visual refresher, this capital stack overview from JPMorgan is solid and shows
how senior debt sits in first position, with mezzanine and equity stacked above it.
Low loan-to-value (LTV) is the other safety lever.
Deals at ~50–60% LTV give lenders a cushion if values wobble, which is precisely the range I
like to see.
As Investopedia notes, lenders use LTV as a direct measure of risk, with lower LTV typically
leading to better terms and more protection.
In today’s market, constrained bank lending has also pushed more deals toward conservative
structures—lower LTV, tighter underwriting, and higher coupons for private lenders.³
That’s a tailwind for disciplined debt investors.
For deeper context on debt vs. equity trade-offs, here’s a quick internal read: debt or equity.
2. Getting Paid First—And Monthly
I started leaning into debt funds after watching how unpredictable equity cash flow became as
Buying rentals or syndication equity that actually cash-flows on day one has been tough without
massive down payments.
Debt funds flip that script.
They can pay predictable monthly distributions funded by loan interest, not by variable
property operations.
And in the higher-rate environment, I’ve seen newly originated loans in the 10–15%
range—sometimes with points—because speed and certainty of close are valuable to borrowers
who can’t wait months for a bank.
Is a 12% target realistic.
Broad private-credit data gives context.
According to CFA Institute/MSCI analysis, global private credit funds returned ~10% in 2023
and continued to outperform private equity into mid-2024, driven by higher base rates and
tighter bank lending.
That doesn’t guarantee a specific fund’s results—but it explains why this corner of the market
has been so attractive.
Zooming out, CRE debt funds’ market share has climbed as banks pulled back, which further
validates the opportunity set for well-structured first-position loans.
Want more on the mindset behind using debt to hold great assets.
Here’s a short internal read: why I love getting into debt.
3. How I Vet Debt Funds (So You Don’t Learn the Hard Way)
Not all debt funds are created equal.
Some are flipper or mezzanine strategies sitting higher in the stack, where your payment
priority is weaker and outcomes depend more on operator execution.
That’s not my lane.
Here’s my simple screen for first-position, low-leverage funds:
• Position & Leverage: First lien only.
Target 50–60% LTV so there’s real equity below you.
Refresh your understanding of LTV here.
• Track Record: I want multi-cycle experience and audited loss history, not just glossy slides.
One lender we’ve worked with reported only three problem loans in ~25 years across
dozens—one small loss, one break-even, and one where they still made money after taking over.
That’s what conservative underwriting looks like.
• Use of Proceeds: Be wary if a “debt fund” is really patching holes in the sponsor’s own projects.
I want independent, arm’s-length lending to third-party operators.
• Cash-Flow Cadence: I prefer funds that distribute monthly once your capital is placed,
typically after a short ramp period.
• Documentation & Risk: Senior-secured notes, strong collateral packages, and no mission
creep into second-position or preferred-equity unless that’s explicitly your mandate.
If you want a plain-English primer on the capital stack, this explainer from Northmarq is useful.
And if you’re comparing alternatives, remember how interest-rate cycles reshape real-estate
returns and LTV thresholds.
This Investopedia walkthrough is a quick refresher.
For a listen-on-the-go breakdown of debt and acquisition funds, check out our Mailbox Money
Show episode with Patrick Grimes.
Bottom line: First-position, low-LTV debt won’t make you a cocktail-party hero, but it can
become the backbone of your monthly passive income plan—especially when your goal is to
replace earned income with durable cash flow.
If equity is a home run swing, this is a string of clean base hits.
And enough base hits change your life.
What did I miss.
Tell me your biggest question about first-position debt funds, and I’ll tackle it on an upcoming
episode of the Mailbox Money Show.
Grab my 1-pager on building a 12% passive income plan with first-position debt as the core.
When you’re ready to review deals with us, join our Investor Club.
We’ll send you new opportunities and a quick strategy call so we can align on goals.
Disclaimer
This material is for educational purposes only and is not investment, legal, or tax advice.
All investments involve risk, including possible loss of principal.
Past performance is not indicative of future results.
Consider your objectives, risk tolerance, and consult with qualified professionals before investing.
Works Cited
American Express. (n.d.). Equity meaning. American Express. https://www.americanexpress.com/en-gb/business/trends-and-insights/articles/equity-meaning/
American Express. (n.d.). Loan-to-value (LTV) ratio. American Express. https://www.americanexpress.com/en-us/credit-cards/credit-intel/loan-to-value-ratio/
AAPL Online. (n.d.). Bringing mezzanine capital to the fix & flip market. AAPL Online. https://aaplonline.com/articles/strategy/bringing-mezzanine-capital-to-the-fix-flip-market/
Bronson Equity. (n.d.). Debt and acquisition funds – Patrick Grimes. Bronson Equity. https://bronsonequity.com/debt-and-acquisition-funds-patrick-grimes/
Bronson Equity. (n.d.). Debt or equity? Bronson Equity. https://bronsonequity.com/should-i-invest-in-debt-or-equity/
Bronson Equity. (n.d.). Why I love getting into debt. Bronson Equity. https://bronsonequity.com/why-i-love-getting-into-debt/
Bronson Equity. (n.d.). Building a 12% passive income plan with first-position debt. Bronson Equity. http://www.bronsonequity.com/blueprint
Bronson Equity. (n.d.). Join our Investor Club. Bronson Equity. http://www.bronsonequity.com/join
CFA Institute. (2024, December 19). How the interest rate environment is set to reshape private markets. CFA Institute. https://www.cfainstitute.org/insights/articles/interest-rates-reshape-private-markets
EquityMultiple. (n.d.). Real estate debt funds. EquityMultiple. https://equitymultiple.com/blog/real-estate-debt-funds
Investopedia. (n.d.). Loan-to-value (LTV) ratio. Investopedia. https://www.investopedia.com/terms/l/loantovalue.asp
Investopedia. (n.d.). How interest rates affect property values. Investopedia. https://www.investopedia.com/articles/mortgages-real-estate/08/interest-rates-affect-property-values.asp
Investopedia. (2004, October 8). Why interest rates matter. Investopedia. https://www.investopedia.com/articles/basics/04/100804.asp
JPMorgan. (2024, June 18). What is a capital stack in real estate? JPMorgan. https://www.jpmorgan.com/insights/real-estate/commercial-term-lending/what-is-a-capital-stack-in-real-estate
MSCI. (2024). Private credit funds eclipsed private equity in 2024. MSCI. https://www.msci.com/research-and-insights/quick-take/private-credit-funds-eclipsed-private-equity-in-2024
Northmarq. (n.d.). Understanding the capital stack in commercial real estate investing. Northmarq. https://www.northmarq.com/insights/knowledge-center/understanding-capital-stack-commercial-real-estate-investing
Principal Real Estate. (2025). The case for CRE debt (Investor Brief). Principal. https://brandassets.principal.com/m/1e4fed5f4b014231/original/PrinRE-Steady-returns-strong-foundations-Case-for-CRE-debt.pdf
Spotify. (n.d.). Mailbox Money Show – Patrick Grimes. Spotify. https://open.spotify.com/episode/2Z9CQnIzGvMhoBcJ5VHFGu
