How Do You Know if Trust Deed Investing is Right For You?
When it comes to trust deed investing, you essentially become the bank and that allows you to charge higher interest rates than a bank might. Trust deed investing allows you to invest in real estate (which is always a good idea) without having to deal with the hassles of being a landlord. Sounds great, doesn’t it? So how do you know if trust deed investing is right for you?
Can you make quick decisions?
Trust deed investments are short-term and they need to be acted on quickly. If you are hesitant because you are unsure of the market or the property, it could have a negative impact on your investment. A good fund manager will have the expertise and skills to perform the analysis and due diligence on each loan. Investing in a professionally-managed fund can save time and it is generally preferred by passive investors. When investing, it is important to educate yourself or seek the help of a financial professional. When structured properly, trust deed investments can be great passive income generators.
Of course, you should know the market value because that will help you ensure that the property will be worth the amount of the loan or more in the event of default. This is very important because the bank will get paid back before you do so you want to be sure there is enough money to at least recover your investment. But while property due diligence is very important, it is ultimately the buyer’s payments that make your investments in Real Estate Trust Deeds profitable. Remember to be sure that they have the strength and the funds to pay you back.
Do you want to make passive income?
When investing in a trust deed, the investor is buying someone else’s real estate loan, which is secured by a trust deed. When a real estate investor purchases trust deed, they are setting up a relationship as an intermediary between the original lender and the borrower. In Trust Deed investing the name/company name will be on the actual deed as the lender with and ROI of 10% to 12% and interest only payments. This rate will be decided upon by the investor and the borrower and the payments are delivered to the investor on a monthly basis.
Because trust deed investments are secured by real estate, your money works harder and smarter without the risking drops in interest rates and returns. Trust Deed Investing is a tried and true method of creating a steady stream of fully collateralized, passive income.
Are you willing to take the risk?
The risk adjusted returns of trust deed investments are very attractive. However, there is no such thing as a risk-free investment. First of all, these investments are not liquid so they cannot be converted into cash quickly. Secondly, there is real risk involved, the most obvious of which being that the borrower defaults and the lender cannot sell the home for more than the amount of the loan. To a great extent this risk can be mitigated by properly valuing the property and structuring the deal with a high enough margin of safety.
There is also the possibility of unanticipated legal disputes involving the property, the navigation of which could easily destroy investment returns. It is necessary to have advisors with relevant experience should a situation such as this arise. Furthermore, while there are safeguards in place to protect against fraud, real estate transactions are susceptible to unscrupulous individuals looking to take advantage of unsophisticated lenders. Realizing the superior risk adjusted returns offered by trust deed investing is not for the faint of heart and requires a certain level of sophistication.
That being said, investing in trust deeds can be done in a safe manner. The investor needs to be armed with the proper knowledge and to take care in crafting each investment including conducting the proper financial analysis and thorough due diligence.