- Is Deed of Trust a good investment? Each investor has different requirements and yield.
- What is my collateral on my Deed of Trust investment? The pledged property.
- How much can I earn on Deed of Trust investing? Typically, 8% to 9.99%
- What is the minimum investment for trust deed investments? Please contact us for details.
Trust Deed Investing FAQ
What is Trust Deed Investing?
Deed of trust investing is loans secured by real estate. Generally, trust deed investing is relatively short-term loans (maturity under five years, with many loans two years or less) made to professional real estate investors and developers.
Why Investors and Developers do not go to the bank for those loans?
Due to underwriting guidelines (very strict set of credit criteria) banks and other financial institutions must follow; They are either reluctant or unable to fund those type of transactions because usually those type of properties either needs some work or high vacancy or both. Therefore, real estate investors have limited financing options available to them, and lenders to this market are able to command relatively high interest rates. Therefore, Investors need short term financing to turn the property into acceptable credit criteria for the banking industry or sell it for potential profits.
What makes trust deed investing attractive?
Trust Deed investments offers an attractive yield with relatively lower risk and a collateral. Trust deed investors usually earn high single-digit annual returns, paid monthly. Usual returns are between 8% to 9.99%. The risk of losing money in a trust deed investment is mitigated by a built-in margin of safety; If structured properly.
What is the loan to value?
Usually its up to 75% LTV of property value or purchase price for single family (1 to 4 units properties)
Interested in Trust Deed Investments?
How can I invest in trust deeds? There are four main options for an individual to invest in a trust deeds:
(1) Personal source individual loans and lend money directly to real estate investors;
(2) purchase loans backed by real estate from brokers;
(3) invest in a fund that invests in trust deeds;
(4) identify people who are directly investing in trust deeds as a group and invest along with them.
Do I need a broker to find me deed of trust deals? What if I personally source individual loans and lending money directly to Real Estate Investors or Developers for me?
Unless you are a professional real estate investor with a significant amount of time available and knowledge to find deed of trust borrowers and manage your investments; if not, then the answer is probably no. Personally, sourcing deals, evaluating them, negotiating terms, and managing the legal issues is for very experienced real estate investors. There is significant risk for investors and lenders who do not know how the deed of trust market and real estate market works.
Is it safe to invest on my own with the help of a broker?
Many Deed of Trust investors do rely on their brokers to present them on deed of trust deals. Also, many Deed of Trust investors rely on the broker to perform many of the due diligence on their loans.
Can I use an IRA for trust deed investing?
Yes. The first step is to work with a self-directed IRA custodian company. Contact us for details.
Why would I want to use IRA funds instead of other funds to invest in trust deeds?
Income received into an IRA or other qualified retirement account can be re-invested tax-free. The taxes are due when the funds are withdrawn from the account. Income from trust deed investments is treated as ordinary income. In other words, it is taxed at a relatively higher rate than some other types of income. Investing in trust deeds from an IRA account neutralizes this disadvantage of trust deed investments vs. some other types of investment that are taxed at a lower rate.
Can anything go wrong with my Loan (Trust Deed)
What can go wrong investing in real estate loans?
Trust deed investing has two options: (1) the borrower performs and/or makes all interest and principal payments stipulated in the loan agreement; (2) the borrower defaults. In the case of a default, the deed of trust investor has a clear pathway, called foreclosure, to taking over the property that is the security for the loan. Few examples:
- If the real estate market drops in Value.
- Collateral/property’s valuation mistake.
- The borrower files for bankruptcy.
- litigation affecting title to the property.
What happens if real estate values drop during the course of a trust deed investment?
The equity risk of the real estate investment is first borne by the borrower. If real estate values drop, the borrower takes the first loss on their investment, and is still obligated to make interest payments and ultimately pay off the loan. If borrower defaults on the loan (stops making interest payments or fails to pay off the loan at maturity), then the lender generally has two choices; (1) foreclose and sell the property (2) encourage the owner to sell the property without pursuing a foreclosure.
If the proceeds from such a sale are not enough to satisfy the loan in full, then the transaction is referred to as a “short sale.” It is “short” in that the lender is agreeing to the sale even though the lender will come up “short” of the amount of money they should receive under the loan terms. In either case if the property is sold for less than the value of the loan and interest owed, the trust deed investor (lender) would take a loss on the investment.
What happens if the borrower files for bankruptcy?
It will cause delay in being able to foreclose on the property. In California, the foreclosure process takes about four months from the time of filing the notice of default to the time of the foreclosure sale. If the borrower files for bankruptcy, that could add weeks or months to the timeline. However, if there is equity in property then the bankruptcy process may take longer. Also, a bankruptcy judge has the ability to re-write key terms of the loan. For example, the judge could reduce the interest rate on the loan.
What if a fire destroys the building that is security for a trust deed investment?
The Deed of Trust investor (Lender) should be named as an “additionally insured party” on the fire insurance at the time of the investment. In this case, the lender should receive their original investment back even if the borrower defaults.
What is the role of the loan servicer?
The loan servicer collects interest payments from the borrower and disburses them to the deed of trust investor.
What is LTV? Why is it important?
LTV means loan-to-value. If a property is worth $1,000,000 and the loan amount is $600,000, then the LTV is the ratio of these two numbers (60%). The LTV is important because the margin of safety is directly related to the LTV. A low LTV means a higher margin of safety for the lender.
What is LTC? Why is it important?
LTC means loan-to-cost. If a property is being purchased for $700,000 and the trust deed investor is providing a new loan for $455,000 on that property, then the LTC is 65%. LTC is important because it shows how much “skin in the game” the borrower has.
What happens if the borrower doesn’t perform?
A default occurs when the borrower fails to make an interest or principal payment, or fails to live up to some other provision of the loan agreement. At this point, the lender instructs the loan servicer (an independent company that deals with the borrower or the broker or broker assigned representative) to file a notice of default. The first step in a series of events that culminates in a foreclosure sale. In California, it takes about four months to hold a foreclosure sale after the notice of default is filed. At any time prior to the foreclosure sale, the lender and borrower could make arrangements that would obviate the need for the foreclosure sale. For example, the borrower could cure the default by bringing all of his or her payments current. Or, the lender (Deed of trust investor) could give the borrower an extension on the loan maturity.
Disclaimer: It is not intended to be investment advice, tax, legal or accounting advice. This material has been prepared for informational purposes. Each investor is recommended to seek his or her own tax, legal, accounting, and investments advice and/or options. Information may have been sourced from various sources and individuals.