The following is a post by MPFJ staff writer, Toi Williams, who is a professional personal finance blogger of Fine Tuned Finances. She has backgrounds in personal finance, sales, and real estate.
The loose lending practices of past years have resulted in many banks carrying large amounts of bad real estate loans on their books. In the attempt to unload foreclosed properties, banks are allowing these properties to be sold at bargain basement prices.
Real estate investors are purchasing these properties cheaply, rehabbing them if needed, and then selling them for a profit. Unfortunately, banks are reluctant to lend to these types of borrowers unless the borrowers and the properties they are interested in adhere to a strict set of criteria.
Trust deed investing allows investors to invest in these types of real estate loans without the assistance of the banks.
Trust deed investing, which is secured by physical real estate, provides a way for real estate investors to get the money that they need to purchase properties while funding investors earn an attractive return on their investment.
The Benefits To Investors
Investors can realize a number of benefits by investing in trust deeds. Many of the investments made in trust deeds are relatively short term, maturing in five years or less. Due to the scarcity of funding, the investment can be made at an interest rate much higher than the investor would get with a certificate of deposit (CD) or by purchasing municipal bonds. The borrowers are often willing to pay double digit interest rates for the loans because they plan to make much more on the sale than they are paying in interest for the funding.
When trust deed investments are structured properly, they can offer investors an attractive yield with a risk level that is relatively low. It is not uncommon for trust deed investors to earn annual returns in the high single-digits, which is paid in monthly installments. This makes trust deed investing a very favorable option relative to other investment options with similar risk profiles.
If the borrower defaults on the loan, the lender can foreclose on the property and sell it to recoup the investment, plus any past due interest. The key is to focus on investments that are sufficiently conservative, meaning that the value of the property is high relative to the amount of the loan. If the borrower defaults on the loan, the lender will not lose their entire investment.
Disadvantages To Investing In Trust Deeds
One of the biggest disadvantages to investing in trust deeds is that the investment is not liquid. You cannot quickly convert the investment to cash at need, like selling shares in a blue chip company or municipal bonds. At the onset of the investment, you need to go in understanding that you must stick with your investment until the borrower pays off the loan or until you have foreclosed and sold the underlying property in the case of a default.
It is important for the investor to do their research before they begin directly investing in trust deeds. The investor must take the time to review borrowers’ information, determine the merit of the deal, and perform due diligence on the property. Errors in documentation could mean that the investment you are pursuing is much riskier than it appears. Errors and misrepresentations could also result in litigation or other legal issues for the investor.
How To Invest In Trust Deeds
There are four main investment methods available when it comes to investing in trust deeds.
Some investors choose to personally source individual loans and lend money directly to real estate investors that are within their network. Other investors choose to purchase loans backed by real estate from brokers or invest in a fund that invests in trust deeds. The last method is for the investor to identify people who are directly investing in trust deeds as a group and invest along with them. Many individual investors opt to use funds and brokers because it gives them access to professional real estate investors that are investing on their behalf based on the specific investment criteria the individual investor has set.
Where To Find Trust Deed Investment Opportunities
LoanMLS (http://www.loanmls.com/) – LoanMLS is an online loan exchange that allows investors to search for various types of trust deeds investments, which may be for an individual loan or pools of loans and may be for any type of loan: residential or commercial, secured or unsecured. New trust deeds are listed on LoanMLS every day.
Federal Home Loans Corporation (http://federaltrustdeed.com/) – The Federal Home Loans Corporation services individual trust deed/mortgage loans of any size for brokers, lenders, institutions and private investors. Their comprehensive nationwide Trust Deed Loan Servicing solutions allows them to service fractionalized loans with ease using computer-driven computations.
Wilshire Finance Partners (http://www.wilshirefp.com/) – Wilshire arranges real estate loans secured by deeds of trust held by their investors on residential, multifamily, retail and commercial property located throughout California. The minimum investment is $50,000 for individuals, trusts and qualified retirement accounts.
American Private Money Group (http://www.americanprivatemoneygroup.com/) – American Private Money Group offers high-yield trust deed investments in properties in California to private individuals, corporations, pension plans, 401Ks, retirement funds, IRAs, Roth IRAs, Self-Directed IRAs, and SEP accounts.
The Norris Group (http://www.thenorrisgroup.com/) – The Norris Group offers high-yield trust deed investments to private individuals, corporations, pension plans, 401Ks, retirement funds, IRAs, foundations, endowments, Roth IRAs, Self-Directed IRAs, Charitable Remainder Trusts (CRTs) and SEP accounts. The Norris Group is a California Department of Real Estate licensed Broker (DRE License 01219911) and has brokered more than $250 million dollars of loans since 1997.
Crawford Real Estate Services (http://www.crawfordinvestmentco.com/) – Crawford is a Trust Deed Investment Company (TDIC), fully licensed by the California Bureau of Real Estate, with a 55-year history of investing in Southern California communities. They only accept investors that are California Residents.
So, what do you all think? Have you or anyone you know ever invested in trust deeds? Does it sound like something you’d be potentially interested in? Why or why not?
Share your experiences by commenting below!
***Photo courtesy of https://www.flickr.com/photos/106574022@N04/11477884125/
Interested In Investing In Trust Deeds? Here’s What You Should Know is a post from: My Personal Finance Journey
