One of the leading benefits of trust deed investing is the ability to mitigate risk. With a trust deed, if the borrower doesn’t repay the lender, the foreclosure process is faster and less expensive than a traditional mortgage foreclosure because its non-judicial in nature.
Non-judicial foreclosures enable a lender to bypass the court system and instead execute the terms of the trust deed and any applicable State laws.
In California for example, the non-judicial foreclosure clock starts when the lender records and delivers the borrower a Notice of Default. From that point, the borrower has no less than 90 days to rectify the past-due payment.
If the borrower doesn’t handle the default by repaying outstanding amounts, a Notice of Trustee’s Sale can be filed, and the property can be sold at a foreclosure sale in no less than 21 days.
Because this process is faster and less complex than court proceedings, it minimizes the degree of risk involved in trust deed investing, as well as cost of capital.
Because there’s a protective equity cushion in a trust deed investment, when the property value is higher in comparison to the outstanding loan amount, the investment typically won’t lose any money even if the borrower ends up defaulting on the loan.
The ability of lenders to foreclose on the property and sell it enables investors to recuperate their capital, which isn’t possible with many other investment types.
Another benefit of trust deed investing is that it typically pays an appealing yield relative to its low risk. Also non QM Trust Deeds are often shorter in duration and provided to borrowers who don’t satisfy traditional bank lending criteria, enabling investors to earn annual returns in the high single digits to low double digits depending on the terms of the loan and risk.
Returns on trust deeds are typically paid at a monthly fixed rate amortized over the life of the loan, allowing you to build passive income streams that deliver you a return on investment over a predefined timeframe (or sooner).
When the underlying loan performs as planned, investors can relax while earning monthly income as the borrower pays each month.
To understand trust deed investing, it helps to know the difference between trust deeds and mortgages. There are two primary differences between a trust deed and a mortgage.
The first difference is that a trust deed has three separate parties: the lender, the borrower, and a trustee. The trustee holds the property in trust for the lender. When the lender is paid on time and in full, the trustee won’t have any claim to the property. Comparatively, mortgages are only between two parties—the borrower and the lender.
The second difference is if a borrower defaults on a mortgage loan, the lender must pursue the foreclosure process using lengthy court processes to secure the title to the property so they can sell it and satisfy the defaulted debt.
But with a trust deed loan, the trustee can pursue a foreclosure without lengthy court processes, making it easier and less costly to reclaim the property and investment capital. When a trustee holds onto the property title, they are then in charge of pursuing the final foreclosure if the loan isn’t paid out of default.
While trust deed investing can deliver attractive risk-adjusted returns, there are potential disadvantages to be aware of before you start investing.
For starters, trust deed investments aren’t as liquid as some other investment options — equities can be bought and sold near instantly. Unlike stock investments, you won’t be able to take your money back out as quickly if the investment begins showing warning signs.
Another disadvantage for some investors is that you can’t build capital appreciation or equity during the term of the loan. The only returns you get are your monthly payments. That said, those returns each month are locked in and won’t fluctuate, which does offer more security.
Finally, investing directly in individual trust deeds requires you to evaluate borrowers, negotiate the terms offered to the borrower or seller, and perform due diligence on both the property and the borrower. You’ll also have to navigate the many laws and regulations governing real estate lending in California.
For investors that don’t have experience in the real estate industry, direct investment in trust deeds can be extremely risky and time-consuming process that may not be worth it in the end for the small time investor.
When getting started trust deed investing, it’s essential to keep in mind that trust deed investments aren’t liquid like stock and equity investments—you’ll need to own a large number of trust deeds to balance the risk to a level that’s sensible.
Instead, many investors opt for a trust deed investment fund, which provides far more security and stability for investors because of the distributed risk of multiple trust deeds.
If a trust deed fund is the most sensible way for you to get into trust deed investing, Saint Investment Group can provide you with consistent returns from our advanced portfolio of underlying assets. Give our seasoned trust deed investment team a call today to learn how you can start earning consistent, high-yield, passive income with your hard-earned capital.
Reach out to the expert team of trust deed investment analysts at Saint Investment Group. We’re here to help you invest wisely in trust deeds. Call (323) 483-0291 today to learn more.
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.