Here’s how you can invest in real estate without actually investing in real estate. Sounds like an oxymoron? Maybe, but this article tells you how you can do it in California and do it in a way that carries you little risk. Want to know more? Read ahead.
Buyer’s market in California
Given California’s real estate environment, trust deed investment has a ready market because there is a lot of opportunity. Prices are growing; potential investors are looking for loans; today’s real estate news (from the California Association of Realtors (CAR)) says that an attractive buyer’s market exists in San Francisco. CAR also notes that there are enough default notices and bank repossessions to entice investors. Finally, average mortgage rates in California (on a 30-year fixed-rate mortgage) are rising from 3.87 percent last week to 3.98 percent this week. This makes getting the standard mortgage loan all the more onerous and challenging. Investors will look for alternative solutions and this creates a ready market for trust deed investors.
Are you thinking of becoming a trust deed investor and setting up your business in California? There are few times that are better than now. This article tells you how.
What is trust deed investing?
Simply put, trust deed investing is when you loan money to someone and the collateral is valuable property. In effect, you become the bank where you make a profit by charging interest. Your loan is redeemed by the client who returns the loan plus an interest that falls into the double-digit rates. If he or she fails to return the loan, you can sell the property to recover your investment.
Trust deed is particularly attractive because most of your clients are ready and able to repay the high interests rates that you need. These borrowers are, generally, savvy real estate investors who are planning to make a very large return and/or strike a favorable deal, and are willing to pay for a quick and simple source of capita. They can afford to pay you the strikingly high rates of return because are typically aiming to make an annualized return of 20%-50% on their investment. They come to you because they benefit by getting loans that are fast, simple, efficient and that do not carry any of the hassles of lengthy background credit checks that banks and credit unions conduct.
On the other hand, such deeds can be hugely risky and are not for the weak of heart. The trick is to mitigate the risk since even safe investments can get you into trouble. They carry dangers that include the following: litigation; investors may question your share of the property; your client or some other party can criticize your instruments. For these and other reasons, amateurs should consult practiced investors and take particular care when conducting those first few transactions.
That being said, here are three steps that can help you.
Look at who you are purchasing your trust deed from
1. It is crucial to check that your source is reliable – You can request background or credit checks from the borrowers or firms that are selling trust deeds. Another way is to see whether or not they are licensed. All should be properly licensed with either the Department of Corporations or the Department of Real Estate. Also look for National Mortgage Licensing System endorsements. Next check the company’s websites and social media platforms such as LinkedIn, Google+ or Facebook. These should feature consistent guidelines and profiles. Beware of misleading advertisements or insufficient or contradictory guidelines. The transaction should be transparent.
Lenders should be upfront with you about all details of the transaction. They have to be open to answering your questions, and a reputable lender will encourage you to ask whatever you want. You should be able to have web-based access to relevant loan data during the origination process and you should be able to see the lending guidelines. If a private money lending company has ‘teaser’ rates, ask how to get those rates. There should be no ‘bait and switch’ tactics.
Your deal may go bad, and here you’ll want protections in place such as a “loan buy back” policy where the company agrees to purchase the trust deed from you for the full face value if it fails. Look for these protections on the website and research the company to make sure that it keeps its promises.
2. Review the appraisal on the property – Make sure that the borrower has plunked down at least 10% of the purchase price. This is important because if the client fails to repay and you may need to sell the property, you may end up out-of-pocket if you pay full price in a market down-turn.
Also consider the costs you may have to incur when trying to sell the property. If you have kept your loan to a conservative percentage of the overall value of the home, if the borrower has secured the property at a purchase price under market value, and if she has significant skin in the game you will be in a better place if things go bad.
3. Look at the position of your trust deed – Check to see if anyone else has claims on this property. You will want to be in “first position” so that if anything goes bad, you can more readily use the property to recover your investment. If your trust deed is in “second position” you’ll want to see who is in front and for how much. This is especially important if a rather large creditor holds first place. If the latter occurs, you may want to reconsider lending the loan or you may want to more fully analyze the risks.
The short of it is this…
Trust deed investing in California can be a great way of investing in real estate without investing in real estate. You can make a profit by acting as a pseudo bank that lends out money to others using the property as collateral and benefiting from a highly attractive interest rate. You also have added security because not only can you sell the property if the loan fails, but you have the confidence of a “loan buy back” agreement in place.
Today’s Californian real estate market offers plenty of potential for the starting trust deed investor, but the enterprise can be scary.
If you find trust deed investing shaky, as most beginners do, seek out a qualified mentor who can help you. There are plenty of such companies in North and South California who can help you, and, best of all, experts report that the current Californian real estate market offers some of the safest possible trust deed investments.
The most important thing is to do your homework because while no investment is without risk, you can mitigate the risk by following the steps outlined in this article.