Trust deed investing is investing in loans backed by real estate. In most cases, trust deed investments are short-term loans that mature in less than 5 years, with most loans maturing in 6 months to two years. These loans are made to professional real estate investors who may need financing to fix and flip properties, purchase rental properties or rehab existing properties. Many investors are buying distressed properties at a discounted price to rehab and resell for a sizable profit. We also loan to Second Home owners and foreign nationals.
Banks have long been reluctant to lend to this market, particularly since the recession, because they have a large amount of bad real estate loans on their books as a result of loose lending over the last decade. Banks are very hesitant to make real estate loans that do not fit into a set of strict criteria, which typically requires the property that serves as collateral be in move-in ready condition. Because real estate investors have limited funding options, lenders in this market may charge somewhat higher interest rates.
The typical hard money borrower is an experienced real estate investor who is planning to make a large return on investment or get a great deal and is willing to pay a higher interest rate for a fast and easy source of capital to make the deal happen.
Most borrowers can afford to pay low double digit interest rates to lenders because they aim to make an annualized return of 20% to 50% on their investment. Paying the lender a smaller return allows them to improve their own profits.
When structured properly, this form of investment offers a great yield with relatively low risk to investors. Most trust deed investors earn high single-digit annual returns that are paid monthly, although returns of more than 10% are certainly possible.
If a borrower fails to pay their loan, the trust deed investor is protected by the margin of safety, or the difference between the loan amount and the value of the property. The lender can foreclose on the property and sell it to recover the investment and past-due interest. This is why it is important to make conservative loans, typically with a maximum loan-to-value of 65-70%. Because hard money loans are short-term, usually for two years or less, real estate values are unlikely to change dramatically before the loan is due.
Your money will be protected as you will be listed on the deed as the lender, and you will hold first lien position. This means you will be first to be paid if the borrower defaults. Direct Investors also requires C-ALTA title insurance, fire insurance and homeowner insurance, and that the borrowers have at least 25-30% of his or her own money in the property before a loan is made.
There are many ways to invest in trust deeds, including personally sourcing loans and lending money directly to investors or investing in a fund that invests with trust deeds. Most trust deed investors rely on brokers like Direct Investors to present them with the best opportunities and perform the due diligence on loans. Whether you want to invest just $10,000 or more than $100,000, we will help you grow your investment as safely as possible.