How to Avoid Risks and Safely Invest in Real Estate Trust Deeds
Trust deed investments are generally considered to be safe because they are backed by real property that can be used as collateral in the event of default. However, no investment is completely risk-free. Here is how to avoid risks and pitfalls when getting involved with investing in Real Estate Trust Deeds.
Remember to go out and physically inspect the property against which the loan is being taken out before you lend money. This is a good way to assess the property first-hand and assess the risks yourself. You will also want to take a look at the documents personally. Properties that are owned by families and partnerships present higher risk that those owned by individuals. If you are uncertain about any document, you should not hesitate to call a lawyer for advice.
Investing in Real Estate Trust Deeds is not one-size-fits-all and when it comes to building your investment portfolio, customization is crucial. Investing should be tailored to your budget and priorities. If you are looking for flexibility and diversity, trust deed investments may be the best way to use your investment capital and Diversify Investment Portfolios.
While the stock market can be volatile, investors can Diversify Investment Portfolios and find control in their investment decisions when it comes to trust deed investing. Investors can tailor their investments to their investment objectives and comfort level. Trust deed investments give investors control and security.
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.
Compared to government or corporate bond issuance, individual trust deed investments are relatively small. The limited supply and high demand leads to a high yield for trust deed investors. Trust deed investors usually earn high single-digit annual returns, paid monthly. In some cases, returns above 10% are possible. These returns are very favorable relative to other investment options with similar risk profiles. The risk of losing money in a trust deed investment is mitigated by a built in “margin of safety.”
If a borrower fails to pay their loan, the trust deed investor is protected by the margin of safety. Since you act as the bank, you can foreclose on the property and sell it to recover the investment and past-due interest. Because hard money loans are generally short-term, real estate values are unlikely to change dramatically over the loan’s term. When structured properly, trust deed investments offer an attractive current yield with relatively low risk which makes it a safe investment.