This article is presented by Ignite Funding. Read our editorial guidelines for more information.
As an investor, you have many options when it comes to where you put your money. Day after day, whether you are driving to work or watching your favorite reality TV show, you’ll see advertisements telling you to invest in gold, stocks, digital currency, mutual funds, etc.
And because of those ads, people have become familiar with those types of investments. But very few people are familiar with trust deed investing, although it’s a form of investing as old as money itself.
What is Trust Deed Investing?
A trust deed investment is when a lender (you) lends money to a borrower (homebuilder/developer) that is secured/collateralized by real estate. Trust deeds allow investors to get a passive introduction to investing in real estate without the need for large capital outlays.
Investing in trust deeds means you are loaning your money against collateral. The collateral—real estate/land, in this case—serves to protect the lender’s investment.
This leads us to one of the most important considerations in trust deed investing: the true value of the collateral. It’s especially important that trust deed investors consider the size of the loan they are making in relationship to the real estate collateralizing the loan. This is why a detailed underwriting process is helpful to justify the value of the property, evaluate each piece of collateral at hand, and ensure the borrower is accountable for what they are borrowing.
Before investing in any trust deed, ensure you are provided the following:
- Location
- Type of loan
- Terms and funding date
- Interest schedule
- APNs or property address
- Collateral history, if applicable
- Property details
- Borrower use of proceeds
As an investor, you get to choose which projects you invest in, as well as which borrowers your funds are lent to.
Why Trust Deed Investing?
A loan made via a trust deed is similar to a mortgage. The basic difference is that there are three parties in a trust deed: the borrower, the lender, and the trustee.
The trustee holds the deed while the loan is being paid. Also, there is a signed promissory “note” that defines all the terms of the loan. If the borrower defaults on the loan, the trustee starts the foreclosure process. In a mortgage, the lender has to go to court to get the foreclosure started.
Trust deed investing is so popular because it pays a comparably high rate of return, and the investments are secured by real estate, while other investments like stocks, bonds, and mutual funds don’t provide investors with collateral. Further, once the loan has been made, the rate of return associated with the trust deed is fixed and does not change throughout the duration of the loan.
Trust Deed Investment Best Practices and Considerations
Before choosing a company to invest with, always research the company. As with all investments, there are inherent risks. It is highly recommended that consideration and proper due diligence be given to the company you are entrusting with managing your real estate portfolio.
While trust deeds provide a sense of security through the collateral of the property, they are not entirely risk-free. Economic downturns, changes in real estate values, or defaults can impact the return on investment.
Trust deed investments also lack liquidity, something most investors have become accustomed to, specifically in the stock market. Selling or exiting a trust deed investment may take more time and effort compared to selling stocks, as the terms and conditions may not allow an investor to prematurely exit the investment without penalty, if at all.
Defaults are always a possibility for anyone lending or investing in real estate. How the default situation is handled can be detrimental to the return on your initial principal investment. The default process can be overwhelming for investors who have never taken property back through foreclosure, which is why it is important you work with a reputable and experienced loan servicer.
So when is a good time to invest in trust deeds? The simple answer is now.
Trust deeds don’t follow the volatility of the stock market. They more or less beat to the sound of their own drum. They also provide investors with instant diversification through different geographic locations and phases of real estate (acquisition, development, and construction). Depending on your investing time horizon and risk tolerance, where you invest your money can make a big difference in your financial future.
In each example in the chart, if you invested $100,000 over five years with annual compounding in each of these investment vehicles, the results vary significantly based on the potential performance:
Every investor deserves to have a reliable source of passive income in their portfolio. Had you invested a portion of your portfolio in 2023 in trust deeds, you could have made a consistent 10% annualized return on your investment.
This being said, Trust Deeds are not meant to be the “grand slam” investment of your portfolio. They are meant to provide passive, fixed income that diversifies you from other investment types but still allows you to have control in terms of selecting where you want your funds to be invested.
If this type of investment intrigues you at all or you would like to speak to someone about questions you may have about getting started, check out the Ignite Funding website or call us at 702-761-0000.
This article is presented by Ignite Funding
Ignite Funding offers real estate investments backed by collateral. More specifically, we provide an alternative investment option that matches quality real estate Borrowers with Investors seeking capital preservation in collateralized turn-key real estate investments while earning a 10% to 12% annualized return. Since 2011, Ignite Funding has funded over $1.5B in loans with Investor capital.
Ignite Funding, LLC | 6700 Via Austi Parkway, Suite 300, Las Vegas, NV 89119 | P 702.739.9053 | T 877.739.9094 | F 702.922.6700 | NVMBL #311 | AZ CMB-0932150 | | Money invested through a mortgage broker is not guaranteed to earn any interest and is not insured. Prior to investing, investors must be provided applicable disclosure documents.
Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.