Investment Information: Understanding Trust Deed Investing
If you want to make a smart investment, understanding trust deed investing is important. When structured properly, trust deed investing can yield high returns and a steady stream of passive income. Here’s what you should know.
A common question that is asked about trust deeds is “Why have I not heard of this before?” The easiest answer is that in the past financial planners did not get paid on alternatives investments as they do with securities, therefore if they were associated with large brokerage houses they were not allowed to discuss these options with you. Now some hard money lenders as well as self-directed IRA custodians provide platforms to integrate financial advisors, allowing you to truly diversify your money into any available option that meets your goals.
If you’re interested in investing in real estate but you don’t want to deal with the hassles of buying, selling, refurbishing, etc., consider trust deeds. Trust deeds investments are a type of private real estate loan. These loans work for institutional investors and individuals.
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.”
Another bonus of trust deed investment is that there is no minimum. They can be fractionalized between individuals. HML Investments can help individuals find trust deeds in which to invest.
When investing, it is important to educate yourself or seek the help of a financial professional. When structured properly, trust deed investments can be great passive income generators.