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Using trust deeds to fund your child’s education


College education can cost you upwards of $20,000 for a four year degree according to the College Board.  That’s as much as a sports Honda in a clearance sale.

When you don’t have that money, funding the education becomes gnawingly expensive, but there’s a way out says Dennis Dahlberg, owner of Arizona Real Estate.  His suggestion is: Use trust deed investing to fund your child’s education.  Yields can be as high as as 12%. Sure, it’s risky but if you gird yourself with the appropriate knowledge and precautions, you may find it a Solomonic  option.

The high cost of college is notorious. The more specialized your child’s education, the more expensive it becomes. And what do you do with a child who dreams of becoming a lawyer or a doctor? Or an astronaut, for that matter?

Some economists suggest you can turn to investments to help foot the bill.

Two types of investments

Two of the most popular types of investments that parents tend to turn to are:

  1. Bonds – The government’s forever ready with  bonds of some type or other to sell you. Each has its own rate of maturity. (The maturity depends on the bond type).  Once matured, the government buys the bond back from you for a guaranteed interest rate. These bonds are safe since they’re backed by the U.S. Department of Treasury but offer low returns. Interest rates are usually in the single digits and often as low as 2%. The bonds take significant time to mature, too.
  2. Stock investment –  Parents can choose to buy stocks or shares in a company. When the company loses, the investor loses. When the company soars, the investor’s profit soars. The trick, therefore, is to invest in a  company that  shows  solidity and to monitor the company’s growth.

Investors choose one of two approaches: ‘market timing’ or ‘buy and hold’. Millennials tend to prefer the first : they estimate wehn trends hike and dip, and try to hop out before the end.

Some of the greatest investors such as Warren Buffet reject the Market Timing approach and for good reason. Scores of studies in the Financial Analyst Journal, Journal of Financial Research and other respectable sources veto guesses as a reliable basis for decision-making. In 1994, Nobel Memorial Prize winner Paul Samuelson wrote in the Journal of Portfolio Management that he knows investors who have lost all their money by making guesses according to trends.

On the other hand, the leading German stock picker and market timer, Uwe Lang, urges that when investors sniff danger in their market’s prospects they should sell their stock within 2-5 days and rebuy when the market rises.  He calls this a profit killer. This is the typical market timing strategy.

In short, standard wisdom suggests that ‘buy and hold’ is the safer way to go. Even then investors should shop around for second, third or fourth opinions and avoid putting all their money in one hole.

Trust deed investing: Third investment option

Trust deed investing is risky. No two ways about it. It can also offer high rates of return which is what it can be a tremendous option for funding your child’s college education.

With this type of investment, a parent purchases an interest in a mortgage that is given by a bank or a private lender.  The borrower buys the property. The lender or bank loans the money and the investor (or the trustee) invests money for the privilege of holding the financial deed (i.e. trust deed) to the property.  The investor holds the deed for  several months  to a year depending on the terms of the promissory note (the note that records the conditions of the transaction).  As long at the trustee holds the note, he receives payments plus high interest rate from monthly repayments. Interest rates can be as high as 9%-12%. If the borrower defaults, the trustee can recoup some of his money from the sale of the property.

To benefit from this, one has to make sure that the borrower is both capable of repaying and  reliable enough to repay. (The bank or lender will  generally check this for you). Your transaction also revolves on the value of the borrower’s property. If it is worthless, the borrower may be as rich as Midas but you are likely to see little for your money.

In short…

NerdWallet, one of the leading advisory websites on investments has this to say: If you exercise due caution, trust deed investments can be a great income generator at a time when investments that produce good returns are few and far between.

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