What is a First Position Lien? How Collateral Protects Real Estate Investors
Investors have found a new way to generate monthly passive income- hard money loans, and hard money loan funds. Given the rise in popularity of this type of real estate investing, understanding the risk involved is crucial. Knowing about first position loans and how they are set up is required. This structure is the foundation of nearly all private lending, hard money lending, and professional real estate debt funds. It is the legal mechanism that protects investor capital and minimizes downside risk.
What Is a First-Position Loan?
A first-position loan, or first-position lein, is a secured loan backed by real property, where the lender holds the primary claim on the asset. This means that if a borrower fails to make payments, the lender is first in line to recover funds through foreclosure or liquidation. In simple terms: the lender becomes the bank.
Why First Position Matters for Investors
In private lending, lien priority determines who gets paid—and in what order—if something goes wrong. First-position lenders always have priority over:
– Second liens
– Contractor liens
– Judgment creditors
– Any other claims recorded after the loan closing
This priority gives investors a direct legal pathway to recover capital with the strongest possible position.
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How First-Position Loans Are Secured
To properly secure the loan, several protections are put in place at closing:
1. A lien is recorded on the property through the county’s title office.
2. A title search confirms no prior liens or claims exist.
3. Title insurance protects against hidden issues or errors.
4. The borrower signs a personal guarantee (in most funds and private loans).
These steps ensure the lender has enforceable rights and a real, tangible asset backing the investment.
Why First Position Reduces Risk in Fix-and-Flip Lending
Fix-and-flip projects carry operational risks, but the structure of a first-lien loan significantly reduces financial risk. Because loans are typically issued at 50–70% of the property’s after-repair value (ARV), there is substantial equity protecting investor capital.
Example:
A borrower purchases a property for $160,000 with an ARV of $260,000. A debt fund may lend 65–70% of ARV, protecting a large equity cushion. Even in a downturn, the property’s value often exceeds the loan amount, enabling recovery through resale or investor-managed rehab.
What Happens in a Default
If a borrower stops making payments:
1. The lender issues a notice of default.
2. If unresolved, the lender initiates foreclosure.
3. After foreclosure, the lender may:
– Sell the property “as is”
– Wholesale it to another investor
– Complete the rehab and sell for full value
Because the lender is first in line, proceeds from the sale go toward paying the lender before anyone else.
Why Investors Choose Funds Instead of Direct Hard Money Lending
While first-position lending is inherently protective, managing a default, foreclosure, rehab, or sale requires time and expertise. A real estate debt fund handles:
– Underwriting
– Servicing
– Collections
– Foreclosure
– Asset management
– Property resale
This allows investors to benefit from the security of first-position lending without taking on operational risk.
Learn more about the SRP Debt Fund here
Conclusion
First-position real estate lending offers one of the strongest risk-adjusted profiles in private credit. With legally secured collateral, conservative loan-to-value ratios, and priority repayment rights, investors gain structured protection rarely found in traditional income investments. For those seeking consistent yield backed by real assets, first-position lending remains a cornerstone strategy.
By Mike Krieg
About the Author
Mike is co-founder of Leadoutinvest. He earned his degree in Finance from the University of Montana. His real estate career began in the early 2000s as an expatriate in Samara, Russia, where he raised capital to purchase homes and helped other expats do the same. Since then, Mike has co-sponsored projects totaling over 7,000 apartment and self-storage units, been featured on the BiggerPockets Real Estate Podcast, and taught multifamily syndication to university finance students.
Mike is also the Founder of Storyline, an organization providing leadership training for local leaders worldwide. He lives with his wife Kristen and their three children.
Disclaimer: This article is for educational purposes only and does not constitute investment advice. All investments carry risk, including potential loss of principal. Past performance does not guarantee future results. Investors should consult with qualified financial and legal advisors before making investment decisions.
