Investment Guide: The Trust Deed Investment Process
Before you start investing, you need to know about the trust deed investment process. When investing in trust deeds, 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.
When structured properly, the risks of trust deed investing are fairly limited. 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 investment strategy a smart choice for investors.
According to Master Passive Income, this is the trust deed investment process broken down:
- Finds the buyer with at least $35,000 down payment
- Finds the home and puts it into escrow
- Before escrow closes, the buyer pays him the down payment
- At close of escrow, he records the deed of trust with the terms written out
- The terms have the interest rate, number of payments, down payment, and sale price
- Buyer signs a promissory note to repay the loan with the agreed terms
- Sells the property to the buyer for an agreed upon price (higher than what he bought it for)
- Collects monthly principle and interest payments from the buyer
- Buyer pays ALL expenses as a normal homeowner would. Taxes, insurance, utilities, repairs, maintenance, etc.
If you’re interested in trust deed investing, you should also get to know more about the basic players of the trust deed investment process. There’s the trustor, the trustee, and the beneficiary. The beneficiary or lender is the person or company that lends the borrower money. The beneficiary is entitled to be repaid from the proceeds of a foreclosure. Every deed of trust names a beneficiary who receives the deed of trust in exchange for having provided some sort of benefit to the trustor. The inclusion of a trustee in the deed of trust is one of the more important difference between a mortgage and a deed of trust. The trustee can be an individual, a business entity, or a title company agreed upon by both the trustor and the beneficiary. If the trustor complies with the terms of the deed of trust, the trustee is not obligated to do anything more than act as the holder of the legal title to the property. If the borrower defaults on the loan, the trustee has the power to foreclose on the property on behalf of the beneficiary. The trustor under a deed of trust is the same as the borrower under a mortgage. The owner uses the property to secure the repayment of a loan. In order to be valid, the trustor must sign the deed of trust in the presence of a notary public and file the document with the office for recording property records in the county where the property is located. The deed of trust then becomes a lien against the property.
Here is what you should know before you get started according to Realty Shares:
- Loan-to-Value (LTV): The LTV is a key factor in any trust deed investment and represents the ratio of the loan amount relative to the value of the piece of real estate that the loan is secured against. The lower the LTV, the higher your level of security. In today’s market, first position trust deeds secured by single family homes typically have LTV’s between 65 and 75 percent. This means the property would have to lose approximately 1/3 its value for there to be risk to the Trust Deed Investor.
- The Underlying Real Estate: Although loans secured by real estate are protected by the value of the underlying asset, depending on the method of foreclosure, the nature of the loan, and the value of the property, the investor may or may not be able to recover his entire investment in case of borrower default and lender foreclosure. Thus, it is important to analyze the underlying asset as well as the LTV.
- The Borrower: The borrower’s ability to repay the loan and the borrower’s reputation, experience and background are all important considerations. As an investor you should review this information and understand the risk.
Understanding the trust deed investment process is important because trust deed investments can yield annual returns in the high single-digits paid in monthly installments. Anyone can get involved in trust deed investments but investors should seek expert advice in trust deed investments. There is a lot of information that you’ll need to get started such as real estate valuation, project management, law, and financing. Potential investors should focus on investments that with a high property value relative to the amount of the loan.