Trust Deed Investments

Trust deed investments yield returns of 8% to 12%+ annually. The yield will vary based upon the level of risk associated with the trust deed. These risks may include loan position (1st, 2nd, 3rd position), property type and condition, loan-to-value ratio, and financial strength of the Borrower. Payments are typically made on a monthly basis with loan terms ranging from 12 to 60 months.

Payments can be collected directly by the Lender or a third party Loan Servicer. The responsibility of the Loan Servicer is to issue monthly statements to the Borrower, collect and process payments, and submit the payoff demand once the Borrower is ready to pay off the loan. Most Servicers also offer foreclosure services. The cost of using a Loan Servicer is minimal and highly recommended.

A fractional trust deed, also known as a multi-lender loan, is a trust deed owned by more than one Lender. Let’s use a scenario in which three separate Lenders pool their money to finance a single trust deed. In this scenario, each Lender owns a 33.33% interest in the trust deed and thus each would earn a 33.33% of each payment. If the Borrower defaults on the loan and a decision to foreclose was required, that decision would have to be need to be approved by the majority interest holder in the trust deed or the aggregation of Lenders that make up the majority interest. In this scenario, 2 of the 3 Lenders would need to approve the foreclosure. Many states require that a fractionalized trust deed be serviced by a third party Loan Servicer.

One of the most common risks associated with a trust deed investment is late or non payment. If the Borrower does not or becomes unable to make the payment per the terms of the Promissory Note, the loan is considered to be in default and the Lender has the right to commence a foreclosure action (note, this is specific to trust deed states). Should the Borrower be unable to bring the loan current, the property is sold at a foreclosure sale. The proceeds from the sale will be applied to the unpaid principal, interest, and fees associated with the foreclosure action.

The most common ways of locating trust deed investment opportunities is to attend a local real estate investor networking event, post advertisements on real estate websites, or work with a real estate broker that specializes in trust deed investments. We highly recommend that new investors work with an experienced broker that is local to their market and has a strong understanding of state lending regulations.

The most common mistake made by trust deed investors is funding a high yield trust deed without understanding the risk. We recommend new investors focus on trust deeds secured in 1st position on a single family or multi-family property at 65% to 70% of current value. Lenders in 1st position will get paid first when the property is sold or refinanced. Focusing on trust deeds secured at 65% to 70% of current value will lessen the risk of principal loss if the value of the property declines or a foreclosure action is required. Lastly, single family and multi-family properties are often much more liquid than other asset classes such as industrial properties or land, and therefore may retain their value better through a market slowdown.