Trust Deed Investment Basics
A trust deed, or deed of trust, is a security instrument for real estate loans. Here’s how it works: The investor in a trust deed investment purchases an interest in a mortgage through a promissory note. The investor can purchase the full mortgage or a part of it. If the investor purchases the full deed, they must have enough capital to fund the whole mortgage. Trust deed investments give the lenders a way to invest in real estate without potential risk of directly owning, renting, or loaning themselves. Also, trust deed investments can generate good returns.
Professional real estate investors buy properties at bargain prices, fix up the properties, and sell them for a profit. While banks can be reluctant to lend to these investors unless they meet a strict set of criteria, there are other options. Many borrowers are looking for loans that are too large for community banks and yet too small for institutional banks. Trust deed brokers offer short evaluations, short-term loans, and there are no pre-payment penalties.
Seven Essential Elements
Sure, trust deed investments can be extremely beneficial to investors and the risks are relatively low but there are some things that every investor should know beforehand. According to the California Bureau of Real Estate, there are seven essential elements when it comes to trust deed investments:
- Knowledge, experience, and integrity of the mortgage loan broker (MLB) through whom the transaction may be made or arranged.
- Market value and equity in the property and the security for your loan.
- Borrower’s financial standing and creditworthiness.
- Escrow process involving the funding of the loan or the purchase of the promissory note.
- Documents and instruments describing, evidencing, and securing the loan or purchase of the promissory note.
- Loan servicing provisions, authority and compensation.
- Recovering your investment when the borrower fails to pay.
Trust deed investments offer some great perks for investors and they are a great way to diversify portfolio but there are always risks associated with any investment. Due diligence is required of all investors in any scenario.
According to Realty Mogul, “Trust deed investing can be a great way to earn interest on your money by investing in real estate without having the responsibilities usually associated with real estate investing. Not only will you be able to get a solid rate of return, but you have added security because you either have a loan buy back agreement in place or you can sell the property tied to the loan in case the borrower fails to pay you back. Just make sure to do your homework because, while you can mitigate your risk significantly, no investment is without risk.”