Trust deed investing has become an increasingly popular alternative investment option for investors seeking fixed income returns. By purchasing the beneficial interest in trust deeds as a private lender, investors can earn attractive returns secured by real estate collateral. However, trust deed investing also comes with risks that need to be properly evaluated. This article will provide an overview of trust deed investment opportunities, outline the risks and benefits, and offer tips for evaluating trust deed investments.
Trust deed investing provides attractive yields with real estate collateral
The main appeal of trust deed investing is the ability to earn high fixed returns, often between 8-12%, from short-term loans secured by real estate. By serving as a private lender and funding loans backed by properties, trust deed investors can generate regular monthly income. Additionally, trust deeds are typically senior liens that take priority over other claims on the property. This real estate collateral provides security and ability to foreclose if the borrower defaults.
Short duration and active management allow adapting to changing market conditions
Most trust deeds have a duration of 1-3 years, much shorter than the 30-year terms of conventional mortgages. This short duration gives investors flexibility to adjust their portfolios. As market conditions change, investors can rotate into different types of lending opportunities. The fixed maturity also provides a predictable cash flow schedule for planning purposes. Additionally, trust deed investments require active management by experienced underwriters to source and evaluate loan opportunities.
Illiquidity and lack of regulation pose challenges for trust deed investing
Unlike stocks or bonds, trust deeds are highly illiquid investments with no secondary market for trading. Investors need to be prepared to hold loans to maturity. Trust deeds are also not regulated securities, so there are risks related to fraud, misrepresentation and self-dealing if not carefully vetted. Only experienced sponsors with strong underwriting should be considered. Thorough due diligence is critical prior to funding any trust deed investment.
Conduct proper due diligence on property, borrower, and loan terms
To mitigate risks in trust deed investing, investors need to scrutinize the collateral property, borrower profile, and loan terms. Review appraisals, rental income, and comparisons to confirm collateral value. Analyze the borrower’s credit score, income, and business plan to assess ability to repay. Evaluate the loan-to-value ratio, interest rate, fees, and other terms to determine risk-adjusted return. Legal review of title report and loan documents is also essential to confirm lien position and recourse.
Trust deed investing offers attractive fixed income yields but also comes with illiquidity and lack of regulations. Conducting thorough due diligence allows investors to carefully target opportunities suitable for their risk-return objectives.