If you’re an investor looking to make a name for yourself or simply wanting to provide for your family you’ve thought about all the different investment ideas to bring in passive income such as CD ladders, peer-to-peer lending and dividend stock investing, just to name a few. With these and other investment types there are risks and returns that go with them and trust deeds are no exception however, the risks are significantly lower and the rewards are exceedingly higher than the others. When investing in stocks and bonds there is always the risk of the company going out of business and therefore leaving it unable to pay stockholders and bond-holders, leaving you with nothing but some stress and a life lesson to be learned. With trust deeds, when the borrower does not perform you are left with the property. You’re left with a physical asset, something tangible and most importantly something that you can sell to recover from the investment. Even if the borrower defaults on the loan the investment won’t lose money if the property value is high relative to the amount of the loan. Several exit strategies can be implemented such as selling the note, accepting a discounted payoff, short sale, accepting a deed or simply foreclose on the property and sell the REO.
Now knowing how safe the loan can be, what sort of returns can you expect? Investors have received returns of 9-12% on trust deeds with a solid margin of safety. There are more people in need of private money loans then there are private lenders leading to supply and demand and a high yield for trust deed investors. The returns are also more consistent than other investments which fluctuate depending on interest rates and the economy. However, like the other investment types there are still risks. These investments are not liquid so it cannot be converted into cash right away, leaving you to wait until the borrower pays off the loan or defaults. This is why many lenders are focusing on short term lending to counter this risk. Also, if you didn’t have a well-structured loan to value established then you might not be able to sell the home for more than the loan is worth. That’s why it’s vital to determine the property value and to make sure the loan is less than what the property is worth. When getting into trust deed or any other type of investment it’s important to protect yourself and be sure that you’ll be getting back more than what you put in. There are a plethora of investment types but none of them will give you as high of a yield with as small of a risk than trust deeds can.
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