Real estate has long served as a profitable investment vehicle for consumers of all income levels. Of course, the better off you are today, the more you’ll be able to invest now. There are many options available for property investment, and trust deed investing is a growing sector for those looking to profit from property transactions. What is trust deed investing, and what steps should you take to get started?
What is Trust Deed Investing?
Whether you’ve only recently heard of trust deed investing, or already know some of the ins and outs, it’s important to know exactly what you’re dealing with before trusting your financial security to this type of investing. According to Arixa Capital, trust deed investing is “investing in loans secured by real estate.” Trust deed investing is a short-term investment that often reaches maturity in less than five years. Some loans are as short as two years or 18 months in total.
Why is Trust Deed Investing Attractive?
Trust deed investing allows real estate developers to secure funding where banks might be reluctant to provide capital. As such, a properly structured trust deed investment provides you with an attractive yield and a relatively low risk. Many investors earn high single-digit returns that are paid on a monthly basis. Finally, when compared to other investment options with similar risk profiles, trust deed investing offers a more favorable return.
Getting Started in Trust Deed Investments
William Mencarow suggests to Market Watch that potential investors first eliminate any liabilities of their own prior to investing in trust deeds. Entering trust deed scenarios debt free is preferable to increasing your risk in the event of a default. Assuming you’re already debt free, your first step would be to dip your toe in the waters, as it were. Mencarow recommends that investors start small, and “never, ever buy a note secured by something you wouldn’t want to own yourself.”
Possibilities for initial investments include “partial” trust deeds that cover 12 payments. These are ideal in situations where a renter/owner has been laid off temporarily or works in a seasonal industry. Additional options include securing small notes on building lots from developers, cemetery lots, and county governments, and partnering with another individual to purchase larger notes.
If trust deed investing seems like a viable option to improve your financial holdings, consider contacting Bairstow Eves Sales & Lettings. Bairstow Eves are experts in property sales and lettings in the London market, as well as the South East. You can learn more about the property market in these areas and ask the important questions you need answer to before investing any of your money in trust deeds.
Details to Keep in Mind
Before rushing out to invest in trust deeds, there are restrictions in place for your own financial protection as an investor. As noted by California-based Norris Group, many trust deed investments won’t allow an individual investor to spend more than 10% of their net worth on a trust deed investment.
Trust deed investing has high margin of safety when structured properly. The margin of safety in a trust deed investment is the difference between the loan amount and the value of the underlying property. For example, if the borrower does not perform and the lender forecloses on the property, it can be sold to recover the investment. The best trust deed investments are those where the property is high relative to the loan amount.
If you decide to work with a broker, it’s important to remember that they are not a disinterested party. Brokers are paid a commission for each loan they put together. While working with a broker comes with advantages such as bringing options to your attention and a certain degree of due diligence, that individuals job is to sell those investments. It is your job to evaluate the deal. Do not leave that responsibility to your broker.
Last but not least, you can invest in trust deeds in a number of ways. Private individuals, corporations, pension plans, 401Ks, LLCs, IRAs, Roth IRAs, and any number of other retirement funds can invest in trust deeds. This means you have options when it comes to investing in this particular financial vehicle. As always though, you should carefully consider your financial investments before proceeding with any deal. All investments come with financial risk, and trust deed investing is no different. It is up to you to do the due diligence on any deal and involved property to ensure your financial assets are protected.
Adam Taylor works in wealth management. He likes to be able to share his knowledge and ideas online and is a regular contributor for a number of consumer lifestyle websites.