Low Risk, Big Reward: Why Trust Deed Investing is a Safe Investment
First of all, a trust deed investor is a person seeking a competitive rate of return by loaning private funds on real estate. In short, you’re the bank. The loans are secured by real estate which makes it a safe investment. Trust deed investors make a higher interest yield than would typically be obtained by a regular bank and is secured by the borrower’s equity in the real estate transaction
Why Trust Deed Investments Are Safe
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.
This is safe investment because you will be first to be paid if the borrower defaults. If you are interested in trust deed investing in Miami, Florida also requires C-ALTA title insurance, fire insurance, homeowner insurance. The borrowers must also have at least 25-30% of their own money in the property before a loan is made.
The C-ALTA loan policy insures the lender against loss or damage up the policy limit, plus costs and attorneys. Fees incurred under the policy that are caused by (1) title being vested in a person other than the one shown in the policy, (2) title defects, (3) liens and encumbrances, (4) lack of a right of access to the land, (5) marketability of title, (6) prior mechanics’ liens, and 9&0 street improvement assessment liens. In addition, the policy insures the priority and validity of the lender’s lien on the property, except to the extent that the insured encumbrance is invalid or unenforceable due to usury, the effect of any consumer credit protection, or truth in-lending laws.
Who are the borrowers?
Borrowers can be experienced real estate investors who buy homes then flip them for a profit. Sometimes borrowers are individuals (landlords, business owners, real estate developers, etc.) who need cash and use their non-owner occupied property as collateral. Also, there are individuals who have experienced extreme financial hardship and are facing foreclosure from default, but have significant equity in the home. These scenarios are handled on a case-by-case basis.
These borrowers can often afford to pay lenders low double digit rates of return, even though the loan is well-secured, because the borrowers are typically aiming to make an annualized return of 20%-50% on their trust deed investments. Paying the lender a much lower return (relative to their projected returns) allows them to enhance the returns they earn on their cash investment.
Real estate investors and developers who are looking to take advantage of fixer-upper properties, short-sale properties and foreclosures use commercial hard money loans. Hard money loans are popular with these investors because they can get the loan in a matter of days.