An interest rate of 9% or higher and stable monthly payments sounds too good to be true to some investors. While there are many, many benefits to investing in trust deeds, like any investment, there are also some risks.
The biggest risk is that the borrower will default on the loan. If this happens the trustee will no longer earn interest payments. The trustee also has to foreclose on the home and sell it, which can be a hassle. Finally, if the home is sold for a loss, the trustee will lose his/her initial investment. The easiest way to help mitigate the foreclosure risk is to ensure that you are investing in deeds of trust for properties that are worth their loan amounts. Basically, don’t buy a trust deed on a property that you would not want to own yourself (although you it doesn’t necessarily have to be somewhere you would want to live). Also, make sure that you connect with a trustworthy appraiser to give you a solid idea of the value of the property before moving forward with the investment.
Another downfall of trust deed investing is that your investment is not liquid. If you purchase stocks, for example, you can always cash out and sell them if you need money quickly. With trust deed investing, you are locked in for the investment term. The term can be anywhere from 24 months to over 20 years. You earn interest during this time but you cannot cash out your initial investment until the term is over.
Although trust deed investing does have some risks,
the benefits usually greatly outweigh them.
Since your investment is backed by property, it has real value in case of a default. The property can be sold to recover your funds as long as the lender is also repaid. It is possible and legal in some states to invest in deeds of trust independently. However, a broker can prove to be an invaluable resource in navigating the often complicated world of trust deed investing. Talk with a broker about your specific financial situation to determine if investing in trust deeds is a good strategy for you. A broker can also help you navigate the specific laws and regulations based on the state the property is purchased in.
Trust Deed Investing on a Budget
Smart investors can earn high interest rates with negligible risks by investing in deeds of trust. Before you take this next step in your investment portfolio, learn the basics of investing in trust deeds to decide if they are a good investment for you and your budget.
One little known but high yield real estate investment strategy called trust deed investing can be a critical tool for experienced investors to grow their investment portfolio. Investing in deeds of trust is a specific type of real estate investment wherein the investor, or trustee, invests money as a third party in the mortgage process. The bank or lender loans money to the borrower, the borrower repays the money to the bank, and the trustee invests money directly to the lender in order to act a third party intermediary and hold the legal title to the borrower’s property. The lender then pays the trustee interest for holding the title. Interest rates a generally higher than most other investments at anywhere from 9 to 12 percent.
Not only does trust deed investing yield a high rate of return, it is also a rather low risk investment. The investment is secured by the actual real estate purchased by the borrower. An accurate appraisal helps guarantee that the property is actually worth the money that has been invested in it. If the borrower defaults, the investor’s funds can be recovered by the sale of the property. In some cases, the investor can even take over payments from the borrower and acquire the property without an additional sale. This way there are no escrow fees, additional inspections, or closing costs.
Now that you know the benefits of investing in trust deeds, you are probably wondering how exactly it works and what your role as the investor is. As the investor, you invest money to hold the legal deed to the property. You do not live at the property nor do you have to maintain it, the borrower does this and he/she holds the equitable title to the property. If the borrower makes payments on time, all the trustee has to do is earn interest from the bank for the length of the investment term. Investment terms can cover anything from a few months to several years. If the borrower defaults, the role of the trustee changes a bit. Now instead of just collecting monthly interest payments, the trustee is responsible for selling the property on behalf of the lender. The money from the sale helps pay back your initial investment.
Trust Deed Investing with Limited Resources
One common misconception about trust deed investing is that it can only be done by the very wealthy. This is not true. There are many lower cost options for budgets of almost any size. If you are on a budget, you might consider pooling your resources with a friend. Make sure that you both agree on the property and borrower that you are investing in and you can split the monthly interest payments. This is a way to purchase a larger deed of trust without investing more money. Some brokerage firms also offer trust deed investing pools where you can combine your resources with others to make a larger investment.
In addition, you can look into investing in lower value deeds of trust. Things like cemetery plots can actually be a great deed investment and they are usually less expensive because they are smaller and less valuable than a larger property or house. In some cases and states it is also possible to do partial trust deed investing also know as Fractional Trust Deeds. Basically you would purchase a part of a deed for a shorter period of time like 12 months compared to several years. You can also look into investing in deeds of trust that have been defaulted. This can be a great way to get into trust deed investing but is a very specialized niche. It is usually more risky but the investments are cheaper and often the returns are quite high.
Trust deed investing is a great investment tool to earn high interest rates with little risk of losing money because your investment is backed by real estate.
Make sure to talk with a licensed broker before you attempt investing in deeds of trust. A broker can work with you to find the best loan lengths, terms, and interest rates. He or she can also help you navigate the ins and outs of the specific laws and regulations in your state. Your broker can also help you invest your limited funds in the smartest way possible to earn the highest returns.
Foreclosure and Trust Deed Investing: What You Need to Know
Investing in trust deeds is generally considered to be a fairly safe investment strategy. Like any investment, there are risks, and knowing how to protect yourself and your money is a crucial step in having a successful investment.
Investing in deeds of trust is a great way to earn high, fixed interest without having to do much work. Investing in deeds of trust is a specific type of real estate investment where the investor (now known as a trustee) invests money as a third party in the mortgage process. The bank or lender loans money to the borrower, the borrower repays the money to the bank, and the trustee purchases an interest in the deed directly from the lender in order to act a third party intermediary and hold the legal title to the borrower’s property. The lender then pays the trustee interest for holding the title. Interest rates a generally higher than most other investments at anywhere from 9 to 12 percent. Deeds of trust are a fixed investment so you earn that interest rate over the length of your investment.
Now that you know the benefits of investing in trust deeds, you are probably wondering how exactly it works and what your role as the investor is. As the investor, you invest money to hold the legal deed to the property as was discussed previously. You do not live at the property nor do you have to maintain it, the borrower does this and he/she holds the equitable title to the property. If the borrower makes payments on time, all the trustee has to do is earn interest from the bank for the length of the investment term. Investment terms can cover anything from a few months to several years. Interest is fixed and paid monthly as additional, relatively stable source of extra income.
However, as with any investment there is some risk associated with trust deed investing. The greatest risk is that the borrower will stop making monthly payments. If this happens, you as the trust deed holder, will begin to initiate the process of foreclosure on the property. The trustee has the power to sell the property for the lender. If the property is sold for a loss, the trustee will lose his/her initial investment.
Protecting Your Money during Trust Deed Investing
Although it is rare, defaults do happen and it is important to take every step necessary to secure your initial investment. One of the best rules of thumb is to never invest in a trust deed on a property you would not want to own. This does not mean that you want to live there, but that you could see the benefits of owning it as a rental, or it is in a desirable location, or has some other feature that gives it extra value. You also need to work with a good team that involves an appraiser. An accurate appraisal on a property helps make sure that it can be sold for the value of the loan, should a foreclosure situation arise. As long as the lender can recover its funds, anything left over will pay back your investment before transferring to the borrower.
Another key to protecting your money is to make sure that the property is always covered by a comprehensive hazard insurance policy. Fires, floods, and other natural and man—made disasters happen. If the home is destroyed, and insurance policy will help pay back both the lender and trustee. Make sure that the hazard insurance is current and sufficient on any properties that you are investing in trust deeds for.
Finally, you can help protect your money by always holding the first deed of trust on a property. Some lenders sell additional shares of trusts in the form of second or even third trust deeds. Basically what this does is put you in a line to be paid back in the event of default. The first trust deed holder is always the first to be paid back their investment if the loan defaults. Second and third trust holders often never recoup their funds.
Finding the right broker can make
all the difference in trust deed investing.
Make sure that you are using a broker or firm that knows the ins and outs of trust deed investing. Ask about the team of realtors, appraisers, home inspectors, and other professionals they work with to secure you investment. Also, make sure that they know you are only interested in being the first deed holder on any trust deed investments. Do your research about applicable laws and special circumstances to help protect your money.
Dennis Dahlberg
Broker/RI/CEO/MLO
Level 4 Funding LLC
Hard Money Lender
Hard Money Loans
Hard Money Loan
Arizona Tel: (623) 582-4444
Texas Tel: (512) 516-1177
Dennis@level4funding.com
Dennis Dahlberg Broker/RI/CEO
NMLS 1057378 | AZMB 0923961 | MLO 1057378
22601 N 19th Ave Suite 112 | Phoenix | AZ | 85027
111 Congress Ave | Austin | Texas | 78701
About: Dennis has been working in the real estate industry in some capacity for the last 40 years. He purchased his first property when he was just 18 years old. He quickly learned about the amazing investment opportunities provided by trust deed investing and hard money loans. His desire to help others make money in real estate investing led him to specialize in alternative funding for real estate investors who may have trouble getting a traditional bank loan. Dennis is passionate about alternative funding sources and sharing his knowledge with others to help make their dreams come true. Dennis has been married to his wonderful wife for 43 years. They have 2 beautiful daughters 5 amazing grandchildren. Dennis has been an Arizona resident for the past 40 years.
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