Why Do Trust Deeds Make a Good Investment?
Investing in Trust Deeds appeal to many investors because they offer (1) consistent monthly income, (2) use real estate as collateral, and (3) they allow investors to invest locally. Many investors equate investing in trust deeds to owning rental property without the hassles of property management. Yields on trust deeds typically range from 8% to 12% annually based upon location, property type, strength of borrower, and loan to value ratio. Payments are generally made monthly to the Lender.
What is a Trust Deed Investment?
A Trust Deed investment is a loan made by an Investor (commonly referred to as the Lender) to a Borrower which is secured by real estate. The Borrower makes monthly payments to the Lender per the terms of the Promissory Note. The Lender is returned their principal investment once the Borrower repays the loan. These types of loans are referred to as hard money or private money loans and are an excellent platform for cashflow investing.
If the Borrower stops making payments, the Lender has the option to foreclose on the property. The proceeds from the foreclosure sale should return the Lender’s principal investment and unpaid interest / fees.
The term Trust Deed investment refers to the document or Deed of Trust that secures the loan to the property.
How Do I Find a Good Trust Deed Investment?
Prospective trust deed investors are encouraged to turn to a licensed real estate broker that specializes in trust deed investments. A broker will be able to identify trust deed opportunities that are best suited for the investors risk profile and yield requirements. Further, brokers will have a better understanding of local lending regulations and assist with the servicing of the loan.
Focus on the Right Trust Deeds
A good rule of thumb for investing in trust deeds is to focus on first position loans at no more than 65% to 70% of value on a single or multifamily property.
By investing in a first position trust deed, the trust deed has priority over all other subordinate trust deeds secured on the property. Once the property is sold or refinanced, the proceeds from the transaction are first paid to the 1st position trust deed. The subordinate trust deeds will be paid any remaining proceeds.
When limiting the balance of the trust deed to 65% or 70% of the current property value, the Lender is reducing their risk of principal loss if the value of the property value were to decline or the Lender was required to foreclose.
Single family and multi-family property are considered lower risk asset classes when compared to other assets classes such as industrial or land. When the market slows, single family and multi-family typically hold their value better because they have a larger market of buyers.
What if the Borrower Stops Paying?
If you invest in trust deeds long enough, you will be required to initiate a foreclosure. This may occur for many reasons including, borrower nonpayment, loan maturity, unpaid property taxes, lapse in insurance coverage and so on.
No matter the instance, the primary concern of the trust deed investor should always be to preserve their principal investment. If transaction is underwritten favorably, the proceeds from the sale of the real estate asset should be sufficient to repay your principal investment, unpaid interest, and any other fees or costs associated with the foreclosure actions.
Common Mistakes Made by Trust Deed Investors:
- Investing in trust deeds 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 is 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 has issues. 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 such as industrial, retail, or commercial space. Further, if the property securing the loan is subject to litigation or other known issues will affect the market value of the property.
- Waiting too long to act on a default. Lenders should take immediate action when a default occurs. Should the Lender wait too long to act, the unpaid interest, late fees, property taxes, and costs associated with the foreclosure may accrue to a amount greater than the value of the property.
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 https://talimarfinancial.com/about-trust-deed-investing/.