What Exactly is Investing in Trust Deeds
Most investors are aware that they can invest in hard assets such as real estate, diamonds, gold, collectables, fancy automobiles, paintings, etc. All can be held physically or by operation of law; for example, an automobile pink slip, or a real estate ownership certificate called a deed. Deeds enable ones’ ownership of real property to be reflected as public record. Other investments such as stocks, bonds, mutual funds, US treasuries, bank savings accounts, IRA accounts are considered as securities. Under the Securities Act of 1933, and the Securities Exchange Act of 1934, the US government established the Securities and Exchange Commission, to oversee all securities transactions to prevent fraud and intentional deception. Generally, any evidence of indebtedness is defined as a security.
A Trust Deed and a Mortgage are both evidences of indebtedness and security instruments. They are designed to be recorded at a municipal or county public records office. These instruments give notice to the public and evidence the pledging of a property as security. When a property owner/borrower signs a trust deed, the lender expects to take security interest in the property until the loan is paid. The borrower also signs a promissory note, which is their promise to pay the lender an agree on amount plus interest for a set period of time. Once the loan is paid off, the trust deed is reconveyed thereby releasing the borrower’s lien and removing the lenders interest from public record. A more in-depth discussion of the parties, responsibilities, and obligations in a trust deed and mortgage will be discussed later in another article.
So, who are the lenders? Consumers usually assume that the lender is a bank, credit union, Wall Street based lender, or some quasi- government entity such as Fanny Mae, or Freddy Mac. That is not always be the case. Private parties who have capital to invest can also elect to invest their proceeds into a loan transaction. Private money investors serve as an alternative source of financing to institutional banks or similar sources.
An industry exists where mortgage brokers act as intermediaries soliciting real property loan transactions and at the same time soliciting private party lenders who may want to invest. This industry is known as private money or hard money lending.
Who can invest? Individuals, family trust, corporations, LLC’s, IRA’s, 401k’s, and pools created for the sole purpose of investing in trust deeds or mortgages.
Parties elect to invest into trust deeds because of reasonably high yields and monthly payments. Yields on first trust deeds may range from 7.5 % per annum to 10% per annum. Yields on second trust deeds may range from 10% to 12%. The trust deed industry is highly regulated by multiple government agencies. A further discussion of the difference between a first and second trust deed can be found on www.danharkey.com, entitled “Liens and Encumbrances affecting Real Property Loan transactions.”
The matching of trust deed investors with available loan transactions is an ongoing process. Mortgage brokers must constantly solicit new loan transactions, and investors, who may want to invest in the new loan transaction. Lender/investors have the choice of purchasing the entire trust deed or a fractional portion of the trust deed. Title will be held for each investor as a tenants-in-common. For example, a $500,000 trust deed investment may have multiple owners: party A owns $100,000 or a 20% undivided interest, party B owns $50,000 or a 10% undivided interest, party C owns $200,000 or an undivided 40%, and so on, all adding up to 100% ownership. The trust deed is recorded with each fractional investor’s name and their interest becomes a matter of public record.
An investor who purchases multiple trust deeds up to $1,000,000 may have an average monthly yield of 8%, with a monthly cash flow of $6,667 to add to their financial health and quality of life. Usually, other forms of investments that yield 8% or more require a lot of management and responsibility.
Each lender/investor receives a material disclosure package outlining the loan transaction, with summary of proposed loan investment, borrower application, credit report, financials, preliminary title review, and loan documents, and related disclosure documents. This information allows investor(s) to make an informed decision to invest or not to invest.
Investors can expect full communication from the loan servicing broker, with interest payments sent, or communication about the disposition if payments are not received in a timely manner. They can expect to be in periodic contact with the servicing broker, forging an ongoing and maturing relationship for the future. If the lender or investor is dissatisfied, they can choose not to reinvest. Here lies, the pressure on the mortgage broker to preform in the most professional manner.
If I can answer any questions or I can refer you to a good source for trust deed investments, I am only a phone call away. Please visit my web site www.danharkey.com to read more of my articles related to this and many other issues regarding business financing, humor, and prospective.
Thank You!
Dan Harkey
Business and Private Money Finance Consultant
Bus. 949 521 7115
Cell 949 533 8315
This article is intended for educational purposes only and is not a solicitation.