Development of disease-modifying therapeutics is urgently needed for treating Alzheimer disease (AD). AD is characterized by toxic β-amyloid (Aβ) peptides produced by β- and γ-secretase-mediated cleavage of the amyloid precursor protein (APP). β-secretase inhibitors reduce Aβ levels, but mechanism-based side effects arise because they also inhibit β-cleavage of non-amyloid substrates like Neuregulin. We report that β-secretase has a higher affinity for Neuregulin than it does for APP. Kinetic studies demonstrate that the affinities and catalytic efficiencies of η-secretase are higher toward non-amyloid substrates than toward APP. We show that non-amyloid substrates are processed by β-secretase in an endocytosis-independent manner. Exploiting this compartmentalization of substrates, we specifically target the endosomal β-secretase by an endosomally targeted β-secretase inhibitor, which blocked cleavage of APP but not non-amyloid substrates in many cell systems, including induced pluripotent stem cell (iPSC)-derived neurons. β-secretase inhibitors can be designed to specifically inhibit the Alzheimer process, enhancing their potential as AD therapeutics without undesired side effects.