Trust Deed Investing is a smart way to diversify your portfolio and grow your wealth. Like any form of investing, though, it’s important to ensure your deals are structured in a way that minimizes your risk.
Also referred to as private mortgages, Trust Deed Investing allows you to finance someone else’s real estate loan. It’s secured by a trust deed, which is an agreement that transfers the property’s title to a trustee who holds it as a security for the borrower and lender. This alone gives the lender a great deal of protection, but there are three primary ways these investments can run into trouble.
1. Losses in the housing market. One of the greatest concerns is a large scale downturn like what happened during the recession. If values drop or a property won’t move when it’s time to sell, the borrower may either be unable to pay or might take a hit, making it harder for him or her to make good on the loan.
2. Resale losses. Although it’s not often seen with short-term Trust Deed Investing, the structure typically enables the lender to resell the investment, much like a bond. Given the fact that money is usually only tied up for a matter of months, most investors can either hold off on collecting the principal or they simply don’t invest if the money might be needed elsewhere. However, those who need to sell can sometimes take a loss if there isn’t another investor lined up to take over.
3. General borrower defaults. Things happen. Occasionally borrowers run into financial trouble elsewhere or run into roadblocks. These things can make it harder to pay or, at the very least, diminish a borrower’s motivation to pay.
Pitfalls Can Be Addressed with the Right Contractual Terms
There is a number of things that can be done to make Trust Deed Investing more secure for the lender. For example, starting off with a lower loan-to-value (LTV) ensures there’s enough equity in the project to cover any market changes. Generally speaking, a 70 LTV or lower is best to start, but once you’re established and have worked with specific borrowers before or are working with those who are well-qualified, you can opt to go higher.
Taking first position on the deed of trust gives the investor more power as well. Lastly, requiring hazard insurance on the property and having a title policy can provide additional layers of protection, ensuring the outcome will be profitable; come what may too.
Learn how to evaluate terms or work with a pro who can set you up for success.
Knowing what terms to insist on requires experience, something those new to Trust Deed Investing simply haven’t had time to accrue. The good news is, a seasoned broker who has been through the process repeatedly and under various market conditions can help ensure you’re set up for success, connect you with resources as needed, and show you the best prospects. When you’re connected with the right people, you’ll naturally risk less and earn more on your investments.
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About the Author: Dennis has been working in the real estate industry in some capacity for the last 40 years. He purchased his first property when he was just 18 years old. He quickly learned about the amazing investment opportunities provided by trust deed investing and hard money loans. His desire to help others make money in real estate investing led him to specialize in alternative funding for real estate investors who may have trouble getting a traditional bank loan. Dennis is passionate about alternative funding sources and sharing his knowledge with others to help make their dreams come true. Dennis has been married to his wonderful wife for 43 years. They have 2 beautiful daughters 5 amazing grandchildren. Dennis has been an Arizona resident for the past 40 years.