Trust Deed Investing: What Beginners Need to Know

Trust deed investing is an alternative investment strategy in which investors make loans secured by a deed of trust on real property. You’re investing in development loans, and you get interest paid back to you. These can be secured against the value of the property, which adds a safety buffer for investors. 

It has become increasingly popular in recent years as a means to achieve higher returns than traditional investment vehicles, such as stocks and bonds, might offer. Despite this, before you take the plunge into trust deed investing, you should know the ins and outs, risks, and returns.

What is Trust Deed Investing, and How Does It Function?

Investing in trust deeds essentially means investing in loans underwritten with real estate as collateral. The lender uses a deed of trust to secure a loan when a borrower takes out a loan to buy or renovate a property. As an investor, you effectively become the lender. You supply the funds, and you receive interest, of course. This means that the property is used as collateral if the borrower defaults on the loan. This means that, even in the worst-case scenario, you may be able to recoup your investment by foreclosing on the property and selling it.

Trust deed investing loans are typically fixed-rate and fixed-term, making them straightforward to understand. These loans are typically used for short-term investment real estate deals, like fix-and-flip or bridge loans. The idea is that when the borrower either sells the property or refinances, the loan is repaid, and you, as the investor, benefit from the returns on your investment. To navigate these investments more effectively, many investors choose to consult with experienced trust deed investment advisors who can offer guidance on selecting the right opportunities, ensuring due diligence, and minimizing risks.

Why Investors Should Opt for Trust Deed Investing

There are many advantages of trust deed investing. Perhaps its most exciting characteristic is the potential for higher returns in comparison to conventional investments. The trust deed interest rates fall between 8% to 12%, which is a higher return than you would have from savings accounts, bonds, or other low-risk investments. This makes it compelling for investors seeking reliable income streams.

You also receive the added benefit of security from the real estate below. A secured loan is backed by the property, something which offers some level of protection in case the borrower defaults on the loan. They are secured loans, which means that if the borrower defaults, the investor can foreclose on the collateral property and sell it to recoup their investment, adding greater peace of mind.

Trust deed investing also provides greater flexibility than other types of investments. Investors can select what types of real estate loans they would like to invest in, from residential to commercial properties. It also offers the opportunity to tailor the investment to match your financial objectives, with a focus on both short-term profitability and long-term returns.

Trust Deed Investing: Risks & How to Protect Yourself

Like all investments, investing in a trust deed carries risks. One of the major risk is the risk of borrower default. If the borrower defaults on payments, the investor risks losing money. Because the property is collateral, there is no guarantee that it will sell for the amount needed to pay off a loan balance, particularly in a down market.

A second risk is that the investment will be illiquid. Trust deed investments are typically long-term investments, meaning your money is tied up in the loan for the term. The downside is that if you need access to your capital before the loan is repaid, you may face challenges selling or liquidating your investment promptly.

To minimize these risks, it’s important to conduct comprehensive due diligence before investing in a trust deed. This checks the borrower’s background, analyzes the property’s value, and verifies the loan’s conditions. Investing in trust deeds can be a great way to diversify a portfolio, but it’s essential to exercise caution and conduct thorough research before investing. Moreover, spreading your investments over several loans can help mitigate risk and lessen the impact of a single default.

Getting Started with Trust Deed Investing in the U.S.

The first step is to educate yourself on the process and how these investments work. Many investment firms provide resources and webinars to help you get up to speed on the basics. And after you wrap your head around the idea, do this:

• Research reputable investment firms or platforms: A good place to start is by looking for firms that specialize in trust deed investing. These firms tend to have access to vetted opportunities and direct you through the investment process.
• Review the terms of the investment: Take a close look at the details, including interest rates, loan terms, and any other applicable fees, before investing your money. Transparency is key.
• Reduce risk by starting small: Reduce risk and learn. Many investors start by investing a small amount of money. This will help you learn more about how the market works without committing fully.
• Seek professional advice: A financial advisor will help determine if trust deed investing is right for you. An advisor will have the insights needed to help you understand what decisions you need to make.

As you gain experience and confidence, you can gradually increase your investments in larger projects. By taking these steps, you’ll be on your way to a successful start in trust deed investing.