October 9th, 2012
Due to the housing bubble bursting and mass bank foreclosures on personal properties and homes, nearly 20% of the mortgages that sit within a bank's balance sheet are now delinquent, and banks are weary to continue widespread lending.
With banks not lending as freely as they used to, the real estate market now has a supply and demand imbalance. Real estate investors still want to invest, but they do not always receive instant loans from banks, so they must rely on trust deed investing for their initial down payments and investment costs.
When you lend money to a reputable borrower, your name appears on the deed of trust as a lien holder, giving you the same right to foreclose as banks have when they lend mortgages.
The difference is clear: Title deed investments are safer than stock market based investments, because investors have the property as collateral.
Anyone can get into trust deed investing, however individuals who have at least $50,000 to start with will more likely benefit. Usually, private individuals, corporations, LLC companies, nonprofits, and others can invest in a trust deed. There are even ways to use IRAs or SEP accounts to use as part of the investment.
Trust deed investing is a relatively safer choice than traditional investments for these reasons:
1. Trust Deed Investments are short-term loans that are secured by real estate, thus making them safer than just investing in traditional stocks or bonds, hoping that the market works in our favor.
Until recently, popular investment platforms for the average working person were stocks, bonds, and mutual funds. In our current economic climate, we are all more skeptical of investments in the stock market; many of our retirement funds have disappeared, and for some, houses have been taken by the banks as well. We yearn to invest our money and watch it grow once again, but we are weary.
Investing in a properly researched and secured trust deed has a relatively low risk, because if the borrower does not make the desired profit (or does not repay for any other reason) you are able to foreclose on the property yourself, and sell it to recoup your initial investment and overdue interest.
2. Average investors can expect a 9% - 12% annualized return on their money in a fairly short amount of time.
Most trust deed investments mature in under five years, and many in two years or less.
3. The main difference between a customary bank mortgage and a trust deed investment, is that the trust deed involves a trustee.
The trustee is a person other than the real estate investor (borrower) and the trust deed investor (lender) who holds the legal title on the property for the lender until the borrower’s loan is totally paid in full. If the borrower defaults on the loan, the trustee will give the lender the legal title so that he or she can foreclose on the property.
4. Borrowers must buy homeowners insurance for their properties, and your name (the lender) will appear on the insurance policy as the payee in the event of something happening to the home or property.
If any insurable event occurs that lowers the value of the investment, the lender will still be paid by the homeowners insurance policy.
5. You can minimize the risk of losing your investment by doing some research.
Trust deed investing can offer a high return with very low risk, however perspective investors should realize that there is always a margin of risk.
The margin of safety in a trust deed investment is the difference between the loan amount and the property value.
Proceed with “due diligence” as you would with purchasing your own property before you engage in trust deed investing.
Research the current value of the home or property, and the title status. Dig deeper if there a significant difference between the appraised value of the property and the assessed value. Find out about any possible legal issues the current owner might be involved in over the property, and use your judgment.
6. You may already be knowledgable about the real estate market.
Money invested in long-term stocks or bonds may or may not become profitable in the same amount of time as trust deed investments, but the risk of losing everything is far higher. The stock market is volatile, and most people are not financially knowledgable enough to successfully invest in other businesses. Most people investing in deed trusts have access to quickly learning enough about how the real estate market works to research the home or property in question and safely decide whether or not the purchase will make a profit.
7. You can go through a trusted broker to handle all the details that you might overlook.
In many cases, individuals can use brokers to be the go between in not only finding, but securing a location for an investment. A broker is someone who handles all of the paperwork in regards to that of the investment; an individual lends money to the borrower through the broker's services. Brokers work directly with the borrower and handle all of the back office services, such as collecting payments from borrowers, mailing out notices and statements, and the end of the year IRS taxes. With a broker by your side there will be less risks since the broker knows the market better than the average investor. So if you are one of the lucky ones to still have a little something left over in your savings after the downfall of the economy, consider working with a broker to make a trust deed investment.
About the Author
Since 1997 Aaron Norris has originated California trust deed investments to companies and individuals alike. Research on the California real estate market combined with extensive network of professional real estate investors has created millions of dollars in profits. Contact Aaron Norris to learn more about trust deed investing and hard money lenders today.