For investors who seek unique ways to diversify their portfolios without greatly increasing their risk, first trust deeds can be an excellent option. With first trust deed investing, you can generate a steady stream of passive income with a relatively strong risk mitigation factor.
While investing in first trust deeds comes with many upsides, there are some drawbacks that can prove complicated for those less experienced in the real estate world, making investment funds that hold first trust deeds a more secure alternative for those who place safety and security at the top of their priority list for investing.
To help you decide if investing in first trust deeds is right for you, we’ll uncover the various merits of first trust deeds, along with how to keep your risk to a minimum when getting started.
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To start, let’s talk about what a first trust deed is. When someone refers to a trust deed as a “first” trust deed, this simply means the deedholder has the first lienholder position if the property is defaulted on. In other words, they’re the FIRST to get paid back, and the FIRST to have a claim towards the collateral.
A first mortgage is similar in concept. If the homeowner has a second mortgage on their property, and they default on their first mortgage, the lender on the first mortgage will get any funds from the foreclosure sale of the property first. The second mortgage lender will only get sale proceeds after the first mortgage debt is fully satisfied. This means the second mortgage lender may take a loss if the property was poorly maintained or the sales market is soft. Obviously, it’s better to be in the first position in these scenarios.
It’s important to note that trust deeds aren’t in the first lienholder position by default, so when someone makes a point to say “first trust deed,” they’re highlighting the fact the deed takes precedence over any other claims to the property in the event of default. A first trust deed, then, is one of the most secure rights to property, helping curb investment risk substantially.
First trust deeds are similar to mortgages in that they’re a claim to a property that provides legal recourse in the event of borrower default. While first trust deeds and mortgages are similar in nature, there are some benefits to first trust deeds that mortgages don’t possess from a legal perspective, which has an impact on risk to those who invest in these financial instruments.
In the event of default, when a property has a mortgage on it, the mortgage lender must follow a legal process called “judicial foreclosure,” which can be lengthy in nature and cause significant delays in recouping costs shouldered by the lender. In some cases, a Judicial foreclosure can take years to process.
Conversely, first trust deeds have a much more favorable legal process involved when it comes to borrower default. This process is called “non-judicial foreclosure” and comes with far fewer legal hurdles and time constraints, making it the superior option for real estate investors who want the least possible downside risk.
Essentially, first trust deeds are an alternative to mortgages for lending money on real estate, with slightly different legal ramifications that positively impact the risk profile for the investors who back the loans.
Investing in first trust deeds comes with many benefits for those looking to diversify their portfolios while minimizing risk exposure.
Perhaps the primary reason investors choose first trust deeds for their portfolios is because of the appealing yields and consistent cash flow they can provide. Typically, investors receive returns at a fixed monthly yield until the underlying loan is fully paid off.
Many investors opt to have these returns reinvested, but receiving them as dividend payments is possible too. Investors seeking consistent, predictable cash flow are attracted to first trust deed investing for this reason.
First trust deeds are more attractive investments than other forms of mortgage-backed securities because the foreclosure process is significantly faster, with fewer legal costs involved. Because of this, risk profiles of first trust deeds are highly attractive from a real estate investment standpoint.
Another way first trust deeds help curb risk for investment portfolios is that they offer a tangible asset as collateral for the underlying loan on the property. In the event the loan isn’t repaid, the holder of the first trust deed can foreclose on the property and sell it to recoup their investment. This is far different from stock investments that can go to zero with little to no way of recovering the loss.
There are a few ways you can start with trust deed investing, one of which is direct lending to individual homebuyers. This means you’ll be lending your own money directly, requiring your own underwriting, analysis, legal paperwork, and servicing of the loan. Because the legal landscape of real estate fluctuates constantly, investors new to the space can easily find themselves facing legal issues when they get involved with individual first trust deeds. Additionally, there is a major risk of investment loss if you’re going the direct lending route.
It’s important to be aware that investing in individual first trust deeds isn’t nearly as secure as spreading your risk across a pool of multiple first trust deeds instead. Investing in a fund that holds multiple deeds can significantly reduce the risk of losing large amounts of investment capital for real estate investors.
For most investors, the far more secure option that delivers consistent returns is investing in a first trust deed fund (like one offered by Saint Investment Group). Investing with seasoned managers of first trust deed funds often affords investors greater stability and stronger overall returns, with less need for detailed analysis of each property on the investor’s part.
Saint Investment Group has the first trust deed experience to offer our investors premium opportunities and optimal risk hedging. We hold numerous types of property in our first trust deed fund, delivering stable, consistent passive income every month to our investors.
When you’d rather have a team of first trust deed experts on your side to analyze every deal that goes into your portfolio, along with detailed reporting, Saint Investment Group is here to help you get started in first trust deed investing. Call (323) 483-0291 today to learn more about investing in our first trust deed fund.
A master in Investment, Marketing, and Capital Raising.
Nic has honed his focus on the Real Estate and debt markets with Saint Investment Group and pursues large-scale Distressed Asset purchases with his partners and syndications.