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In the realm of real estate investing, trust deeds present a compelling opportunity for investors seeking steady returns while mitigating risks. However, before delving into the nuances of investing in trust deeds, it’s crucial to understand what a trust deed entails.
A trust deed, also known as a deed of trust, is a legal document utilized in real estate transactions involving a loan. It serves as security for the lender (the investor), providing them with recourse in case the borrower defaults on the loan. In essence, the trust deed outlines the terms of the loan and grants the lender the right to foreclose on the property if the borrower fails to meet their repayment obligations.
Investing in trust deeds offers several compelling advantages, including:
Trust deed investments provide a steady stream of passive income in the form of monthly interest payments from borrowers. This consistent cash flow can serve as a reliable source of income, making trust deeds an attractive option for investors seeking regular returns.
Real estate has long been regarded as a stable and tangible asset class. Trust deeds offer investors the opportunity to capitalize on the security of real estate without the responsibilities of property ownership. In the event of default, investors have recourse to the underlying property, which can be sold to recoup their investment.
Property Type: Single Family or Multi Family
When venturing into trust deed investments, focusing on single-family or multi-family properties is advisable due to their lower risk profile. These types of properties tend to have more stable rental income streams and lower vacancy rates compared to commercial properties, thus offering a more reliable investment avenue.
Loan-to-Value Ratio (LTV)
One of the critical factors in minimizing risk is adhering to a conservative loan-to-value ratio. It’s prudent to stick to 65% LTV or less, ensuring that the investment is adequately secured by the underlying property. This approach provides a buffer against potential market fluctuations and safeguards the investor’s capital.
Position of the Loan
Investing in first-position loans is another safeguarding measure. By holding the primary lien position on the property, investors are prioritized in the event of foreclosure, increasing the likelihood of recovering their investment and accrued interest.
Purpose of the Loan: Non-Owner Occupied Business
Opting for non-owner occupied business purpose loans adds another layer of security to trust deed investments. Unlike loans for primary residences, these loans are intended for investment properties, which often generate income through rent. This focus on income-generating properties enhances the likelihood of consistent cash flow, thus bolstering the investment’s stability.
Borrower’s Credit History
Lending to borrowers with a strong credit history is paramount in minimizing default risk. Typically, borrowers with a credit score of 675 or better demonstrate a solid track record of managing their financial obligations responsibly. Conducting thorough due diligence on the borrower’s creditworthiness can provide valuable insights into their ability to repay the loan as agreed.
Lender Title Policy
Obtaining a lender title policy is a crucial step in insuring the loan is properly recorded on the property without issues that might compromise the loan. This policy provides protection for the lender against any defects in the title that may arise, such as undisclosed liens or ownership disputes. By securing a lender title policy, investors can mitigate the risk of potential legal challenges that could jeopardize their investment.
Investing in trust deeds offers an attractive opportunity to generate passive income and diversify one’s investment portfolio within the real estate sector. By focusing on single or multi-family properties, adhering to conservative loan-to-value ratios, prioritizing first-position loans, targeting non-owner occupied business purpose loans, lending to creditworthy borrowers, obtaining a lender title policy, and recognizing the benefits of cash flow and the security of real estate, investors can mitigate risks and maximize returns in this lucrative asset class. However, as with any investment, thorough research and due diligence are essential to making informed decisions and safeguarding capital in the dynamic real estate market.
Brock VandenBerg is the President of TaliMar Financial and Fund Manager of TaliMar Income Fund I. Mr. VandenBerg started investing in individual trust deeds in 2008, providing capital to real estate investors taking advantage on the housing crisis. He soon brought in outside investors to share in this lucrative opportunity to earn above market returns. After funding over $375 million in short-term loans and attracting over 500 investors, Mr. VandenBerg launched TaliMar Income Fund I in 2021 to offer investors a much more efficient way to invest in individual trust deeds. Currently, TaliMar Income Fund I invests on behalf of over 220 individual investors with over $60 million in assets under management.
Disclosure: This advertisement is for informational purposes only and does not constitute an offer to sell nor a solicitation of an offer to buy any security. Such offers can only be made by the Private Placement Memorandum (“PPM”) and related subscription documents. Any investment in TaliMar Income Fund I involves significant risk. You should not enter into any transactions unless you fully understand all such risks and have independently determined that such transactions are appropriate for you. Business Purpose Loans arranged through TaliMar Income Fund I, LLC (DFPI CFL License No. 60DBO-137778).
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