Investing in Real Estate without Investing in Real Estate
The title to this post may sound rather contradictory, but we’re going to talk today about a common strategy when it comes to making your money grow and using real estate to do it, but without actually purchasing any real property – trust deed investing. With trust deed investing, you can participate in the returns of real estate investing, but without the hassle of identifying, acquiring, fixing, maintaining, managing and eventually reselling actual real estate.
Simply put, trust deed investing is when you loan money to someone and that loan is secured by real property. You can think of it like a mortgage where you are the bank. In this way, you can earn interest by loaning money to someone where this loan is tied to a property, and if they fail to pay back that loan, you can sell that property to recover your investment.
Now, this has been a simplified explanation of trust deed investing so it may be useful to dive a bit deeper into the details.
First and foremost you must complete due diligence on any investment and trust deed investments are no exception.
Check that you are acquiring trust deeds from a reputable place. You can request background and credit checks for borrowers or firms selling trust deeds. It’s also important to be sure there are protections in place for your investment. Make sure you ask yourself, what happens if the deal goes bad? Many times, firms that sell trust deeds will put in place “loan buy back” agreements whereby they agree to purchase the trust deed for full face value if it goes bad. This can be a great strategy for investor protection.
Review the appraisal on the property to see that the borrower is putting down at least 10% of the purchase price. Think about what would happen in a worst case scenario if you needed to take possession due to a failure to repay. If you have loaned out close to the full purchase price of the home, you may end up out of pocket if there is any market down-turn. Also, think about what kinds of cost you would incur when trying to sell the property. If the borrower has significant skin in the game, has secured the property at a purchase price under market value, and you have kept your loan to a conservative percentage of the overall value of the home, you will be in a much better position if things go bad.
Check to see if there are any other liens on the property. You want your trust deed to be in “first position” meaning, that if anything goes wrong, you are the first person to get paid back. If your trust deed is in 2nd position, you will want to see who is in front and for how much. If there is a rather large creditor in front of you, you may want to loan your money to someone else or fully understand the risks.
Trust deed investing can be a great way to earn interest on your money by investing in real estate without having the responsibilities usually associated with real estate investing. Not only will you be able to get a solid rate of return, but you have added security because you either have a loan buy back agreement in place or you can sell the property tied to the loan in case the borrower fails to pay you back. Just make sure to do your homework because, while you can mitigate your risk significantly, no investment is without risk.