Whole loans vs. fractional notes vs. debt funds: investing in first-lien real estate debt

Private real estate loans have become a core private-credit allocation for family offices, credit funds and accredited investors. They are short-term, secured by real property and usually priced well above public fixed income.

But how you invest matters as much as what you invest in. There are three common structures, and they differ on control, transparency, fees and how much work you take on.

The three structures

1. Debt funds

You commit capital to a fund. The manager originates or buys loans and pools them.

• Control: low. You invest in the manager, not the loans. The portfolio is usually a blind pool.
• Transparency: periodic reporting at the portfolio level. You rarely see individual loan files before the money is deployed.
• Fees: typically a management fee plus a share of profits (carry), and sometimes a spread between what borrowers pay and what investors earn.
• Work: minimal. That's the trade.

2. Fractional notes

You buy a slice of a loan alongside other investors, often through an online platform.

• Control: low. Decisions on extensions, modifications and defaults are made by the servicer or by majority vote.
• Transparency: better than a fund. You see the loan you're buying into, though the depth of the file varies.
• Fees: platform and servicing fees, often taken as a spread.
• Work: low, but you need many small positions to diversify, and you never own the asset outright.

3. Whole loans

You fund and hold an entire loan yourself.

• Control: full. You own the note and the lien, and you decide on extensions and workouts with the servicer.
• Transparency: full. You review the complete loan file before you commit.
• Fees: depends on the source. Some sellers charge a premium or take a spread; others are paid by the originator.
• Work: you need a source of good loans that fit your criteria, and enough capital per loan.

Side by side

	Debt fund	Fractional notes	Whole loans
Choose each loan	No	Yes, a slice	Yes
See the full file first	Rarely	Partly	Yes
Own the loan directly	No (the fund does)	Partly	Yes
Control in a default	Manager decides	Shared	You decide
Typical investor fees	Management fee + carry	Platform spread	Varies by source
Capital per position	Fund minimum	Small	Full loan amount

Questions to ask before you fund any private loan

Whatever the structure, the diligence questions are the same:

1. Lien position. Is it a first lien? A second-position loan is a very different risk.
2. Leverage. What is the loan-to-value, and is it based on a third-party appraisal?
3. The borrower. How experienced are they with this type of project, and what is the exit (sale, refinance)?
4. The originator. Who underwrote the loan, and what is their track record?
5. The documents. Can you see the appraisal, title commitment, term sheet and, for construction, the budget and draw schedule?
6. Who gets paid what. Is anyone taking a spread on your yield?

Why whole loans have been hard to access

The main obstacle for whole loans has never been the structure. It's sourcing. Most investors don't want to build an origination team, and most good private lenders don't have time to market every loan to dozens of buyers.

That's the gap Lender Capital fills. Vetted private lenders submit first-lien, business-purpose loans with the full file. We review each one and send it only to capital partners whose criteria it fits: loan type, size, market and leverage. You see the whole file first, fund the whole loan if you like it, and hold it directly. The originating lender pays our placement fee, so capital partners pay no fees: no management fee, no carry, no spread.

See how it works for capital partners, or request access to start receiving matched loans.