One of the best investments you can make is in a trust deed. Simply put, you become the bank for someone looking to put a loan on real estate. Yields to you can range from 7-15% annually and you can even use money gathering dust in your IRA account too. Most commonly interest payments are made monthly creating a nice form of income.
What is the process? Most investors use a local private lender/broker who already is set up to do deeds of trust or hard money loans. The company will market to borrowers and when a loan comes in, they underwrite the loan just as a bank would. However, instead of the loan being funded by a bank, the lender will use investors like you to obtain financing. What do these brokers look at before deciding to offer a deed of trust to their investors? First of all, they look at both the borrower and the property to see if the loan request makes sense. Here is a short list of items they look at:
Income/Tax returns, W-2s, rents
Assets-Cash , investments, Real Estate
Loan amount vs. value (LTV)
Experience-invested in RE before?
Title- liens currently against property?
Exit Strategy – How will loan be repaid?
Type – Commercial, residential, land, etc.
Income – what is potential rental income?
After the analysis, the broker usually will decide to do the loan and send the borrower an offer sheet outlining the terms of the loan. If the borrower accepts, the broker will then notify his investors there is a new loan to fund and send them an offering.
How do I decide if this loan (deed of trust) is for me? Unless you are making a loan yourself, you are probably putting a lot of faith in the broker who sent you the offering. A few questions to ask yourself and the broker come to mind.
- What is the loan to value? The higher the loan to value, the riskier the loan because if something should go wrong, there is less equity in the property if you have to foreclose and sell it to get your money back. Typically, 50-65% is the maximum you want to go.
- Can the borrower make his loan payments?
- If the borrower cannot pay, could we rent the property?
- Is the property in a stable market?
- What is the exit strategy of the loan? This is by far the most overlooked but most important question. After the loan comes due in 1-5 years, how will the borrower pay us off? A few ways are refinancing with another lender or selling the property.
- Does doing this loan make sense? Why can’t the borrower do a regular bank loan? Find out!
So you have decided to make a trust deed investment. Now create your own loan criteria that you can discuss with the borrower or the broker.
Loan size preferred or amount you want to invest?
What areas will you lend within?
What is your interest rate return minimum?
What is your minimum and maximum loan term? Less than 1 year? 1,2,3 or even 5 years?
What is the maximum LTV you will go up to?
Where do I find available trust deed offerings?
We can put you on our mailing list and when new deeds of trust come available, you will receive a deal sheet with everything there is to know about the opportunity.
I still have questions.
We are at your service. Our contact information is below.