Trust Deed Investing Basics: How to Maximize Your Investment Dollars
An alternative investment such as trust deeds can bring diversification, higher returns, and real estate into your investment portfolio. Trust deed investments open the door to many investment opportunities and offer security and flexibility. Investing in trust deeds may be the smartest decision you make if you are interested high returns and investment diversification. This kind of investing is a great way to make sure that you get a consistent and fixed return on investment. Here are the trust deed investing basics.
According to Scotsman Guide, “Armed with the knowledge of the risks associated with trust-deed investing, investors have an opportunity to make strong, risk-adjusted returns of about 10 percent on individual, self-evaluated first-trust-deed investments and typically 7 percent to 8 percent within investment pools. In addition, mortgage brokers who know where to find these investors can help their clients find loans via these sources.”
What you need to know about the trust deed investing basics is that returns on investment are generally high because trust deeds rely on property as collateral. Essentially, this means that issues like borrowers’ personal finances and credit scores are not important to the collateral value of the property. In order to mitigate risk for investors, trust deeds are always attached to a note with a set interest rate. Loans are short term and interest-only and you get a big payment in your hand at the end of the term which makes it a great alternative investment option. If structured properly, trust deed investments can mean high yield returns in a short amount of time which makes this a investment strategy.
NerdWallet explains how a typical trust deed investment might start:
“A real estate entrepreneur wants to purchase a $500,000 house, hoping to rehab it and sell it at a profit. He has $250,000, but needs to borrow the other $250,000. If he waits for a bank loan, a competing investor might snap up the property — so to save time, he goes to a private lender for a trust deed.
Under the trust deed, the buyer borrows $250,000 from the lender — working through a third-party loan originator who underwrites and facilitates the loan — for one year. For the speed and convenience, the borrower pays a much higher rate then he might for a mortgage, typically 8% to 12%. In most cases, the borrower makes interest-only payments each month and a balloon payment of principal at the end of the term.
Let’s say you’re the investor in this deal, and you agree to a loan at 10% APR. If all goes well, you’ll receive 12 interest payments of $2,083 each, totaling $25,000, and at the end of the year, you’ll get your $250,000 back. And if the borrower fails to make the monthly payments, you take possession of the property.”
Trust deed investors receive monthly payments at the agreed upon interest rate. These payments can be structured in various ways. One is partially amortized monthly payments containing interest and some principal; another is with a balloon payment balance delivered at the end of the loan term. When the borrower pays off the loan or the loan term expires, the investor receives payment for your principal investment and any remaining interest owed.
Basically, investing in hard money trust deeds is like investing in a bond. The trust deed investment will yield you monthly payments with returns above what traditional trust deeds offer. In addition, the principal balance is paid back to the investor in a relatively short duration.