Thursday, May 3, 2012
What Is Trust Deed Investing?
You may have heard the term “Trust Deed Investing” or “Trust Deed Investments” bandied about recently is the press as well as private discussions. Many people, eager to find a source of secure returns that can pay more than the 1-2% currently being offered by savings institutions and Treasury bonds have turned to trust deeds.
Trust deeds are actually very similar to conventional residential mortgages, with a few key differences. First, with a trust deed investment, the investor is the “bank.” They loan money to a real estate professional for a particular real estate acquisition, and the borrower makes monthly payments to them for the duration, or term, of the loan...just like a conventional mortgage. Trust deeds have locked-in rates of return, terms, and pre-payment details specified in the contract.
There are a few differences, however, between conventional mortgages and trust deed investments. First, the typical borrower in a trust deed investment is not an owner occupant of a property, but rather a real estate professional looking to acquire an income property. Many of these properties are purchased by the professional, renovated, and then refinanced or sold at the end of the trust deed term. Second, trust deeds typically pay a much higher rate of return to the investor than banks charge on a regular residential mortgage. Mortgage rates at the time of writing stand right around 4%, where trust deed investments are paying between 7-9%. Last, trust deeds require a higher percentage of equity in the property than a mortgage from a bank. Banks typically require owner-occupant buyers to put anywhere from 3%-10% down on a property. This means the bank will finance between 90-97% of what the home is currently worth (90-97% LTV.) With a trust deed investment, the borrower is typically only allowed to borrow between 65%-80% of what the property is worth. (65%-80% LTV or ARV.) This larger equity spread provides greater protection for the investor in trust deeds.
Most trust deeds are negotiated by trust deed brokers. These brokers act as connectors between investors who want to lend money and borrowers who need money for their projects. The brokers pre-screen the borrowers and also handle all the necessary paperwork involved in the transaction.
Trust deeds are generally viewed as a very secure form of investment for several resons. First, most trust deed brokers limit the loan amount to between 65% - 80% of the after repair value (ARV) of the property in question. This ensures that, in the case of default by the borrower, the property could be sold for more than the amount of the loan and the funds repaid to the investor. Second, the investor becomes the first position lien holder on the property and, as such, his investment is secured by the property itself.
One aspect of trust deed investing that does pose a risk to the investor and often scares potential investors away is the lack of control the investor has over who is borrowing the funds. With typical broker facilitated trust deed investments, the broker screens the potential borrower and the investor has to trust that their decision and risk assessment is accurate. We operate a little differently in that regard. This is because we only broker trust deeds for our own properties. The investor knows that their funds will be going to purchase Team Plantone properties and we are happy to provide a long and detailed record of our years of success in the residential rehab industry in Las Vegas. This is important because it gives the investor an added layer of security. Not only do they know that the loan to value (LTV) ratio on the loan they provide will be strong enough to insure the security of their funds, they have the added peace of mind of knowing that Team Plantone has completed almost 200 rehab-to-rent projects in the last three years and has never defaulted on a single payment. (If you are interested in learning more, see the testimonials page on our website: www.teamplantone.com) In addition to increased security, private brokering provides an added cost savings as well. Since we are only brokering for our own projects, we are able to provide the highest returns possible to our investors without those returns being cut by Brokers Premiums or other fees.
High yield trust deed investments are available to private individuals, corporations, non-profits, pension plans, 401Ks, retirement funds, IRAs, Roth IRAs, Self-Directed IRAs and SEP accounts. If you are interested in learning more about trust deed investments, the yield and secuity they provide, investment minimums and more please contact Glenn Plantone directly at (702) 656-3264 xt: 203