Investing in a Debt Fund vs Making Your Own Hard Money Loans
Direct lending gives you control and the whole yield. It also gives you the underwriting, servicing, concentration and foreclosure. An honest cost of both.
The real competitor is not another fund
When someone evaluates Matador Note Fund 1 LLC, the alternative in their head is usually not a different fund. It is a spreadsheet they built themselves, with one tab per loan, showing what they would earn lending the same money directly to a builder they already know.
That spreadsheet is almost always right about the yield and almost always silent about everything else. So the honest version of this comparison starts with the part that favours doing it yourself.
What you earn direct
You earn the whole rate, plus the points, and you pay no asset management fee and no profit share.
According to Private Lender Link, the average Houston hard money interest rate in the second quarter of 2026 was 9.84%, on an average loan size of about $570,000 across 247 loans. Experienced direct lenders frequently write above that average, because the borrowers who pay the most are the ones who need speed or have a story a bank will not take. Add origination points, which in private lending are collected at funding and earned over a term that is usually far shorter than a year.
Here is what that looks like in arithmetic. Illustrative only.
| Illustrative direct loan | Amount |
|---|---|
| Principal | $300,000 |
| Rate, interest-only | 10.5% |
| Term | 10 months |
| Interest collected | $26,250 |
| Origination, 2 points | $6,000 |
| Total collected | $32,250 |
| Return over the 10 months capital was out | 10.75% |
| Annualised while deployed | 12.9% |
That is a real number and it is higher than the 8% non-cumulative preferred return or the 8–12% annual target total return of our fund. Anyone who tells you otherwise is selling.
Now apply the two adjustments that direct lenders discover in year two. The first is utilisation. Capital between loans earns nothing, and the gap between a payoff and the next funding is rarely zero. If that same $300,000 is deployed ten months out of every twelve, the 12.9% becomes 10.75% on the year. The second is cost, which the next section itemises.
Gross is not net. But gross direct lending genuinely does start higher, and the rest of this post is about what the difference buys.
What the gap actually buys
Seven functions sit between a pile of capital and a performing loan book. You either buy them or perform them.
Deal flow. Finding borrowers worth lending to is a business, not a search. It means brokers who call you first, borrowers who come back, and enough volume to say no to most of it.
Underwriting. For each file: a valuation you trust, a review of the comparable sales yourself rather than accepting the appraiser's adjustments, a title commitment read line by line, verification of the borrower's entity and guarantors, credit and background checks, a look at the construction budget against what the work actually costs this year, and a judgement about the exit. Budget several hours per file, and expect to do it for three or four deals for every one you fund.
Loan documents. A note, a deed of trust, a personal guaranty, a construction loan agreement where relevant, and the state-specific disclosures. These are drafted by Texas counsel and they are the reason a foreclosure works or fails. A bare note-and-deed-of-trust document preparation fee from a Texas title company or attorney runs roughly $300 on its own; a full custom set with a construction loan agreement and guaranty, drafted and reviewed by a Texas real estate attorney rather than assembled from a template, more typically runs $1,000 to $2,500 per loan depending on complexity.
Servicing. Payment collection, insurance monitoring, tax monitoring, payoff statements, default notices, year-end reporting. Texas-licensed third-party loan servicers typically charge in the range of $20 to $40 per loan per month for non-escrowed notes, sometimes with a one-time setup fee of around $150, with escrowed notes and larger balances priced instead on a basis-point-of-balance schedule.
Inspections and draws. On a construction or renovation file, someone physically goes to the property before money is released. Not a photograph the borrower sends. Someone standing in the building.
Workouts. When a loan stops paying, the work changes character completely. Current valuation, title update, counsel, notice, negotiation, possibly a bankruptcy stay, possibly an eviction, then a sale. A workout is not a few phone calls. It is a part-time job for several months.
Diversification. The one function you cannot perform at all with a small book, no matter how many hours you put in.
Price those out and the gap narrows. It does not close to zero, and it should not. A fund charges for the work because the work is real.
The concentration problem
This is the strongest argument on the page, and it is arithmetic rather than opinion.
Take $300,000. In our market, that is two loans of $150,000, or one loan at the average size we have written. Across our own 60 Texas loans since October 2019 the average principal funded was about $222,000, which is $13.3 million spread across 60 files. That is the manager's own lending record, not audited fund performance.
Now run the outcomes. Illustrative, using our own loss experience as the input.
| Illustrative outcome on a 100% loss of one loan | Two-loan direct book | Ten-loan direct book | Pooled across 60 loans |
|---|---|---|---|
| Share of capital in the failed loan | 50% | 10% | under 2% |
| Effect of one total loss on your capital | halved | 10% down | a bad quarter |
| Effect of a 30% shortfall on that loan | 15% of capital | 3% of capital | rounding |
A total loss is the extreme case, and it is not the common one. The common case is worse than people expect in a different way: the loan that eventually returns full principal after a very long fight. One of our own files, a single-family property on 5.3 acres in Damon, Texas, ran 40 months from funding in January 2021 to resolution by deed in lieu. Principal came back in full. In a two-loan portfolio, that file is half your money, immobile, for more than three years. In a pool it is one file among many while the rest keep paying.
Set that against the same record measured across the whole book. Fifty-five of 60 loans repaid on schedule. Five went to workout: four foreclosures and one deed in lieu. Three of those five returned principal in full and two did not. Total principal lost across all 60 loans was under $50,000, which is less than 0.4% of principal funded. Those are the manager's own lending numbers, not audited fund performance, and they are not a forecast of anything.
The point is not that our loss rate is low. The point is that a loss rate is a meaningful number only across a book. Across two loans there is no loss rate. There is a coin.
The deal flow problem
Good loans are allocated, not discovered.
A broker with a borrower who needs to close in eight days calls the lender who closed the last one in eight days. A borrower who has been funded twice calls the same lender for the third. Twenty of our 60 loans were to repeat borrowers, which is the manager's own record and not audited fund performance, and that number is the whole story of how private lending deal flow works.
An individual lender entering the market sees the residue. Not because anyone is hiding anything, but because the files that a fast, known lender declined are the ones that circulate. The specific danger is that the residue looks fine. It is a real property with a real appraisal and a borrower who answers the phone, and the reason three lenders passed is buried in the budget, the exit or the guarantor.
The defence is either local knowledge good enough to see what they saw, or the discipline to fund one deal in ten, which returns you to the utilisation problem above.
The 2am problem
Direct lending is not passive. It is a small business with excellent margins.
The insurance policy lapses and the notice comes to you, not the borrower, and you have to decide within days whether to force-place coverage. The property tax bill goes unpaid, which in Texas matters more than most states because the taxing authority's lien sits ahead of yours. A draw request arrives with invoices that do not match the work on site, and the borrower needs an answer today because the framer is waiting. The payoff statement you emailed gets intercepted and altered, and the wire goes somewhere else.
And the timing is not yours. Texas non-judicial foreclosure sales happen on the first Tuesday of the month, with notice posted at least 21 days in advance, which means the calendar is set by statute and not by your holiday. A bankruptcy filed on the Monday before a first-Tuesday sale stops everything, and the stay does not care what week it is. That is a general description of the framework and not legal advice; any specific file needs counsel.
None of this is hard. All of it is unignorable, and it arrives without warning.
When doing it yourself is genuinely right
For a specific reader, direct lending is the better answer, and we would say so on a call rather than pitch the fund.
Do it yourself if you have real local knowledge, meaning you can drive to the property, you know what that street sold for and you know which builders finish. Do it yourself if you have legal capability, either your own or counsel you already use who knows Texas foreclosure. Do it yourself if you have the time and temperament for servicing, because someone who finds this work interesting will do it well and someone who finds it tedious will do it late. Do it yourself if you have enough capital to write ten or more loans, so that a single workout is an event rather than a verdict. And do it yourself if you want control: the ability to price a loan, extend a term, or take a property back on your own judgement rather than someone else's.
A reader with four of those five should probably be lending directly. A reader with one of them is buying a job and a concentrated risk position at the same time.
A hybrid many people land on
Plenty of experienced investors end up doing both, and the reasoning is usually the same. They lend directly where they have an edge, which is typically a small geography and a handful of borrowers they already trust. They use a fund for the money that has no edge attached to it, to get exposure to loans they would never see and diversification they cannot build alone.
That combination also solves a practical problem. Direct loans pay off unpredictably and leave capital idle. A fund position keeps working in the gaps.
We are not going to tell you what share of anything should sit where. That is a question for you and your advisers, and anyone who answers it in a blog post does not know enough about you to be answering it.
Frequently asked questions
Q: Is it better to lend directly or invest in a debt fund?
A: Neither is better in the abstract. Direct lending pays you the whole rate plus the points and gives you control of every decision, and it requires deal flow, underwriting, documents, servicing and the capacity to run a foreclosure. A fund pays less because it absorbs that work and spreads your money across many loans. The deciding variables are usually how much capital you have to diversify with and how much of your own time the work is worth.
Q: How much money do you need to start private lending?
A: Enough to write one loan is enough to start, and enough to write ten is roughly where the risk becomes survivable. In our Texas book the average loan funded was about $222,000, so a genuinely diversified direct portfolio in this market is a seven-figure commitment. Below that, one bad file dominates your outcome. That average comes from the manager's own lending record and is not audited fund performance.
Q: Who services a private loan?
A: Either you or a licensed third-party servicer. Servicing means collecting payments, tracking insurance and property taxes, administering construction draws, sending the notices the loan documents require, issuing payoff statements and producing year-end reporting. Doing it yourself is free in cash and expensive in attention. Hiring it out costs a monthly fee per loan and does not transfer the credit decisions back to anyone else.
Q: How many loans do you need to be diversified?
A: There is no threshold that makes you safe, only a curve that flattens. With two loans, one default is half your portfolio. With ten, it is a tenth, and a single workout no longer determines your year. Most direct lenders we know start feeling diversified somewhere past ten to fifteen active loans spread across borrowers, asset types and exits, not just across addresses.
If you are weighing your own spreadsheet against a fund position, book a call and bring the spreadsheet. We will go through what it is missing, including the parts that argue for you doing this yourself.
Important disclosures. This article is for informational purposes only and is not an offer to sell or a solicitation of an offer to buy any security. Any offer is made only through the Private Placement Memorandum, Operating Agreement and Subscription Agreement of Matador Note Fund 1 LLC, which govern in all cases and should be read in full, including the risk factors. Interests are offered only to accredited investors as defined in Rule 501 of Regulation D, pursuant to Rule 506(c); accredited status must be independently verified. Real estate debt investments involve significant risk, including possible loss of principal. The 8% preferred return is non-cumulative and is payable only from available distributable cash at the manager's discretion; it is not guaranteed. The 8–12% figure is a target objective, not a promise or projection of results. Targeted returns are not guarantees of future performance, and past performance is not indicative of future results. Figures describing prior lending are the manager's own lending record and are not audited fund performance. Nothing here is legal, tax or investment advice. Matador Lending LLC is not a registered investment adviser.