Make Passive Income Now: Trust Deed Investing Step by Step
Trust Deed Investing Step #1: Real estate investors look for financing.
First of all, borrowers seek alternative financing because they are looking for loans too large for community banks and too small for institutional banks. They need to find financing quickly so they can act on a project. Evaluations can take weeks or months with banks. Banks have strict regulations and lending standards. Someone with a less than perfect credit score would find it impossible to jump through all of their hoops. Hard money lenders can approve an investor in a matter of days.
Trust Deed Investing Step #2: Evaluation
Unlike traditional lenders, the property’s market value is the most important aspect to hard money lenders. The borrowers are savvy real estate investors who are planning to make a very large return and/or strike a very profitable deal, and are willing to pay the high interest rates for a quick and simple source of capital.
Trust Deed Investing Step #3: Due Diligence
Since the land that is selected for the project is the collateral backing the investment, investors should conduct their own research on the project. Investors should personally visit the site, evaluate borrower historical performance records, and view county recorded records.
Trust Deed Investing Step #4: Financing
The trust deed investor’s funds are transferred and held in an independent trust account until presented to the title company to fund the loan. There are no fees to invest since the borrowers cover all of the costs that are associated with the loan.
Trust Deed Investing Step #5: Trust deed is recorded.
A trust deed investment is a promissory note secured by the deed of trust and is payable to the investors at an agreed upon interest rate, repayment amount and time frame.
A promissory note is basically an IOU that contains the promise to repay the loan, the trust deed is the document that pledges the property as security for the loan. It is the trust deed that permits a lender to foreclosure if the borrower fail to make the monthly payments.
Trust Deed Investing Step #6: Payment
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 the principal investment and any remaining interest owed.
These interest payments tend to be higher when compared to other fixed income securities like government bonds. It also tends to be more predictable and substantial than stocks or equity because of the real estate collateral.
Basically, if you decide to start trust deed investing, you stand to make money when the borrower pays back the loan in full or if the borrower defaults on the loan and you foreclose on the property in order to recover your investment.