Investing can be tricky, no matter how financially savvy you are. With the current state of flux in the real estate market, it is no wonder people have questions about whether it’s smart to invest in trust deeds. Here’s the low down.
What Is Trust Deed Investing?
When someone loans money to someone else (generally called the “Borrower”) and the Borrower puts up real estate as collateral, its a trust deed investment. The real estate could be practically any property the Borrower owns, whether it’s vacant, residential, commercial, or has tenants. When you invest in a trust deed, you are basically granting a private mortgage.
The deed to the property stays “in trust” to a third party – most often a corporate trustee, who reconveys the property to the Borrower when the loan is paid back or conveys the property to the Lender if the Borrower can’t pay back the debt.
The Pros and Cons of Trust Deed Investments
As with any investment, whether trust deed investing is for you depends on your level of investment experience and how risk adverse you are. Here are some of the factors to consider when looking at this type of investment.
Many, if not most, investors own property of their own or otherwise have some knowledge about real estate. They have done some research into the market prior to purchasing their own property or have looked into it because real estate investing is so popular.
There is a tangible “thing” as collateral. Trust deed investments are secured by real property that you can see and touch (if you want to) and own if the loan goes into default and you foreclose on the property. That’s why trust deed investing is relatively safe when compared to other higher-risk investments. As long as the real estate has value (and what real estate doesn’t, especially in today’s market), you have a pretty secure investment. Moreover, if you do end up foreclosing, you could likely recoup your investment if you sell it.
Generally, there’s a good rate of return. This really depends on the property, the agreement, and the parties, but the returns you most often see with trust deed investing are between 8% and 12%. Although not a guarantee, loaning to a Borrower with good past performance can mitigate any risk.
The Cons (and How to Mitigate Them)
Foreclosure can be lengthy and legally complicated. If, for example, the Borrower declares bankruptcy, it’s a long legal process to foreclose on that property and you may not get all of your investment back. There is some research you can do on your own (especially if you have real estate lawyer friends), but the law can be awfully convoluted. A broker can be an indispensable resource for you, whether by helping you navigate the loan process or by providing vital information that can help you decide whether to invest or pass on a particular deal.
The FDIC does not insure trust deeds. This means that there is no guarantee you will get all of your investment (or any of it) back. This is yet another reason why working with an experienced broker can be your key to success. A broker can advise you on the best course of action for your trust deed investments. As opposed to working directly with a Borrower, whose interests may definitely conflict with yours, a third party broker can help orchestrate a win-win for everyone involved.
The real estate market ebbs and flows, sometimes unpredictably. The state of the real estate market may affect the Borrower’s ability to pay off the debt. While many investors, as mentioned above, have some knowledge of the real estate market, if there is something unique or special about the property, circumstances, or agreement, you really need to know your stuff. Having a licensed broker with experience in trust deed investing and real estate can prevent you from making a bad investment since they can provide important insight and the means to properly assess a property’s value.
You need to be able to make informed decisions. Timing can make or break the success of trust deed investments. Sometimes you have to be able to provide preliminary decisions without all the facts. Sometimes you only have 24 hours to make the decision. A good broker can help, not just with navigating the process, but also by recommending investments that are based on your unique lending criteria, your style of investing and your particular goals.
Trust Your Broker
Trust deed investments still have their own quirks and risks. As with any investment, there is no downside to having a competent, licensed broker in your corner. If you’re interested in investing in trust deeds, we can help.