Investing in Trust Deeds for Cashflow

Trust Deed Investing

What is Trust Deed Investing?

Trust deed investing refers to providing loans with liens on real estate. Trust deed investments are loans made by an investor or lender to a borrower. In exchange for the loan, the investor’s name is placed on the deed of trust, providing the investor the security of real estate, should the borrower miss payments.

The investment strategy is simple: The borrower makes monthly payments to the lender per the terms of the Promissory Note. The lender is then returned their principal investment once the borrower repays the loan. These types of loans are called hard money or private money loans.

Many investors equate trust deed investing for real estate to owning rental property without the hassle of property management.

Why Do Trust Deeds Make a Good Investment?

Trust deeds resemble mortgages – they are used in banks and private loans to create liens on real estate and appeal to investors because they offer:

  1. Consistent Monthly Income and Positive Cash Flow: Monthly payments made from borrower to lender provide stable cash flow.
  2. Security of Real Estate: The lender is secured by the real estate. Like a mortgage, the property will revert back to the lender in the case of delinquent payments.
  3. High Yield: Trust deeds typically provide a high yield, ranging from 8% to 12% annually based on location, property type, strength of borrower, and loan-to-value ratio.
  4. Local Investments: Location is another primary factor in the success of an investment – an investor will want to ensure capital is deployed strategically, often within a distance they can check on it. For example, California trust deeds make stronger investments than those in remote Montana.
  5. Private Notes: Trust deed investments provide a semi-liquidity similar to stocks; they can be sold, exchanged, and borrowed against as collateral.

Focus on the Right Trust Deeds

A good rule of thumb for prospective trust deed investors is to focus on 1st position loans at no more than 65% to 70% value on a single or multifamily property, which reduces risk of principal loss, should the property value decline or the lender foreclose.

A first position indicates that the investor is the first position, or in priority position, to benefit from asset liquidation. Once the property is sold or refinanced, the proceeds are first paid to the 1st position trust deed. Remaining proceeds go to subordinate trust deeds.

Be cautious when considering an asset in which you would acquire a 2nd position; it indicates that the investor is subordinate to a more senior mortgage or loan. Despite the risk, they provide higher return due to the increased interest rate on the borrower.

What if the Borrower Stops Paying?

If the borrower stops making payments, the lender may foreclose on the property. The proceeds from the foreclosure sale should return the lender’s principal investment and unpaid interest/fees. These are the basics of how trust deed investing in California works. If the transaction is underwritten favorably, the proceeds from selling the real estate asset should be sufficient to repay principal investment, unpaid interest, and other costs associated with foreclosure actions.

Common Mistakes in Trust Deed Investing:

  • Investing in a trust deed with too high of a loan to value ratio. In such an instance, if the borrower were to default on the loan and the property sold at foreclosure, the proceeds may not be sufficient to repay the principal balance and outstanding interest/fees.
  • If the underlying real estate asset is illiquid or problematic. When the real estate market slows, the assets that typically experience the greatest decrease in value are generally those with the fewest buyers, such as land or complicated assets, including industrial, retail, or commercial space. Further, if the property securing the loan is subject to litigation or has other known issues, this will affect its market value.
  • Waiting too long to act on a default. Lenders should take immediate action when a default occurs. Waiting too long means the unpaid interest, late fees, property taxes, and costs associated with the foreclosure may eventually exceed the property value.

How Do I Find a Good Trust Deed Investment Company?

Prospective trust deed investors are encouraged to consult a trust deed investment company.  Trust deed investing is tricky, so you’ll want to collaborate with an accredited trust deed investment company or a seasoned broker as you navigate. A broker can identify trust deed opportunities best-suited for the investor’s risk profile and yield requirements. Furthermore, brokers can have better understandings of local lending regulations and assist with loan servicing.

About TaliMar Financial

TaliMar Financial is a California hard money lender located in San Diego, CA that specializes in funding residential and commercial Fix & Flip, Construction, and Bridge Loans in California.  To learn more about our trust deed investment opportunities call us today (858) 613-0111 x1 or visit us at