In these days of risky stock bets, promised high returns that don’t deliver, and confusing bundled investment strategies it is difficult to find a safe short-term, fixed investment with a reasonable rate of return. It’s even harder to find one that is backed by an asset that prevents the loss of your entire investment. There is one opportunity that answers all of these requests by providing a safe option for the conservative investor who wants to secure moderate growth on a short-term investment, and that is trust deed investing.
What is Trust Deed Investing?
Trust deed investing a.k.a private money lending, is the lending of a private individual’s a.k.a investor(s) money to a borrower(s) who pledge(s) real estate for the loan by way of a publicly recorded deed of trust. Essentially, the investor is taking on the role of being a lender or bank in the lending process – lending directly to the borrower.
Why haven’t I heard about Trust Deed Investing?
Trust deed investing has been around for decades, but is not often presented to investors as a viable solution to their investing needs and style – probably because of the lack of education surrounding it and the lack of mainstream promotion of the strategy as most private money trust deeds are created by small mortgage companies, and are not typically sold or securitized on the secondary mortgage market, a prerequisite for trading in mainstream markets. This, combined with their smaller volume, makes them unattractive to large financial services firms to market to the masses – even though investors might benefit from awareness of these opportunities. This is unfortunate, because trust deeds are very simple in concept and yet rich in benefits.
How does Trust Deed Investing Work?
A borrower who owns or wants to own real estate needs a loan. The borrower executes a Promissory Note wherein the borrower promises to repay the lender (trust deed investor). A recorded Trust Deed creates the secured interest attached to the borrower’s real property. If the borrower does not pay as promised, the Lender/Trust Deed Investor can look to the real property for repayment and/or recovery of their invested capital.
How does one invest in a Trust Deed?
Investors can invest in trust deeds either by directly making a loan – funding a new origination, or by purchasing an existing promissory note – performing loan. Investors can locate trust deed investments through an intermediary known as a Trust Deed Investment Company (TDIC). TDIC’s facilitate the arrangement, performing proper due diligence on potential trust deed investments. Although, investors can discover borrowers on their own, they may lack the time, knowledge, experience, and tools necessary to vet the loan, observe state usury laws, or meet federal and state regulatory, disclosure and reporting requirements.
Candidates for trust deed investing are varied and can include:
- Tax-advantaged accounts like IRAs and other retirement accounts
- Coverdell and other education accounts
- Organizations and trusts
- Non-profit endowments and pension plans
Benefits to Trust Deeds Investing
There are many different benefits to trust deed investing. Some of the most popular include:
- Fixed Income Investment: The loans generally range in term from six months to two years and feature a fixed rate during the term. At the end of the term, the remainder of the principal invested is returned to the investor.
- High Return: Trust deed investments have historical rates of return between 8% and 12%.
- Low Loan to Value Ratios: Properties that are considered for security as part of a trust deed are generally valued at their 90 day sale price. 50% to 60% of that number is used to determine the amount of money the investor loans to the buyer. As you can see the investor’s loan to value ratio is relatively low which helps to create a low-risk investment.
Trust Deeds versus Stocks: Unlike publicly traded stocks, the properties that trust deed investors invest in are valued by independent property appraisers. There are no inflated values based on stock market frenzies, no hidden losses in the property, and no violent fluctuations in your investment’s daily value. And unlike stocks and mutual funds, trust deeds do not have any loads or commissions charged to the investor.
Trust Deeds versus Bonds: Like bonds, trust deeds are loans that offer regular interest payments throughout the term of the loan. Also, like bonds, they can be sold to another investor should the original investor have a need for liquidity. But there are many benefits to a trust deed that are not shared by bonds.
- Regular interest payments on the trust deed include some principal repayment.
- Should the issuer of a bond go bankrupt before your bond matures you may get some of the value of your bond after all other creditors are paid or you may be issued new bonds under a company reorganization. In a trust deed arrangement, if the borrower fails to pay the loan as promised, the deed of trust allows the lender to sell the property through a non-judicial foreclosure procedure. Invested capital may be recaptured at the foreclosure sale from the purchase by a successful third party bidder or through subsequent resale of the foreclosed property.
- Underwriters from the TDIC vet each borrower to ensure a low risk of default.
- Bond rates are volatile and easily affected from the day to day activity of the stock market and other outside influences. Trust deed interest rates tend to stay more level so that as one ends, you can have reasonable expectations of investing in another with a similar interest rate.
The benefits to trust deed investing are too numerous to ignore and it is only a matter of time before they emerge as a vehicle of choice for more investors. They offer the perfect strategy for investors who seek diversification beyond that which is offered by stocks and bonds, investors who need high yields, but don’t want to lock up their money for longer than a few years, investors who wish to preserve their capital while still making an income, and those who want to enjoy a real estate income without the difficulty of managing properties. Trust deeds are a stress-free solution to many everyday investing concerns.