What Is Trust Deed Investing?

With trust deed investing, an investor loans funds to a real estate professional to purchase a property. The residential or commercial property is secured by a trust deed – or deed of trust – with the investor’s name included. The trust deed acts as an agreement between both parties for the property to be held by a neutral third party until the loan is repaid. 

Interest on the loan goes directly to the investor as passive income until the loan is paid in full. Unlike typical bank loans, trust deed loans mature in a shorter time frame – anywhere from two to five years. There are also two types of trust deeds, both differing from a typical mortgage. 

• First trust deed: A first trust deed is the primary loan or lien on a property. Were the property to be foreclosed on, first trust deed investors have priority over other trust deed holders. 

• Second trust deed: A second trust deed exists behind the first trust deed, or primary loan. These loans allow the borrower to further borrow against the value of the property. 

• Deed of trust vs. mortgage: There are only two parties when securing a mortgage – the lender and the borrower. With a deed of trust, however, there are three parties – the lender, the borrower, and the neutral third party. 

Many private lending companies (like Revolution Realty Capital) direct trust deed investing transactions. Depending on the company you invest through, you may be required to have all the funds for a particular property. Other companies may have a minimum amount you need for your funds to be placed in a pool with other investors. This amount could be anywhere from $100,000 and up. 

Now that you know the answer to “What is trust deed investing?” reviewing trust deed pros and cons can help you evaluate whether this type of investment suits your risk tolerance and goals.

Trust Deed Pros and Cons

Most of the effort from trust deed investing comes before any investing is done at all. In fact, having the funds necessary to loan out may be the hardest part of these real estate investment opportunities. Once there, investing in trust deeds requires little effort and has the potential to yield substantial rewards. 

Despite the passivity of these types of investments, there are also drawbacks to be aware of before jumping into the deep end. Review the chart below to understand both the benefits and drawbacks of trust deed investments.

Trust deed pros and cons can give you a more accurate picture of this investment opportunity. However, this is by no means a comprehensive list. Every trust deed investment opportunity will come with its own specific pros and cons.

How To Invest in Trust Deeds

You first need to understand what type of opportunity best suits your needs and circumstances before you can know how to invest in trust deeds. The most common methods for trust deed investing include the following: 

Sourcing individual loans: Sourcing loans on your own may be the most time-consuming method for trust deed investing unless you’ve had significant success in real estate networking. This method requires you to know who is looking for funding and how to structure an agreement with the borrower. 

• How to find these opportunities: One of the best things you can do is to enhance your real estate contact book. Go to local and national conferences or events, ask real estate professionals in your network for introductions to those in their network, and use social media to make solid contacts. 
• Best for: Seasoned real estate investors with years of real estate experience. 

Partnering with a broker: Brokers and brokerage firms have a wealth of information about trust deed investment opportunities. Brokers often act as the middle-man in trust deed investments – connecting the lender with the borrower. These firms also typically have a wide variety of options to invest in – from individual loans to trust deed funds. 

An added benefit of partnering with a broker or brokerage firm is having an ongoing source of information about new investment opportunities. When sourcing on your own, you have to go through the whole process of finding a new borrower every time one deal ends. 

• How to find these opportunities: Research trusted brokerage companies that can provide you with investment opportunities. Reach out to a few different companies that can give you added insight into whether their values and goals match yours. 
• Best for: Both seasoned and amateur real estate investors.

Partnering with a group of investors: By partnering with a group of real estate investors, the risk you take on can either increase or decrease. As with doing your research on the deal itself, you should do your due diligence on the investors you’ll be partnering with. Have any of them had multiple recent foreclosures on properties they’ve invested in? This may not be an issue if it’s happened one time to one investor, but if it’s a common theme among the group, you may want to rethink the partnership.

Group partnerships can be particularly valuable for new real estate investors. Not only can they help you grow your network, but you’ll also benefit from shared years of experience in the industry. 

• How to find these opportunities: Similar to individual sourcing of trust deed investment opportunities, building your network is one of the best ways to locate investor groups. 
• Best for: Real estate investors with some experience and connections in the real estate world. New investors can also get value from these partnerships. 

Once you’ve decided on your preferred method of trust deed investing, you can move forward in finding the right opportunity for your values, goals, and risk tolerance.

Funding Your Investment

Having funds in your bank account to start investing in trust deeds is probably ideal, but unrealistic for many. In fact, most investors recognize that holding funds in a bank account isn’t the best place for them. Luckily, other options are available.

One such option is to use funds from a self-directed individual retirement account (SDIRA). A particular benefit of using the funds in a traditional SDIRA is that the interest earned on the loan will accumulate in the account tax-deferred until the money is withdrawn. There are limitations to using this type of account, so talk with your financial advisor if you’re unsure whether or not using it for trust deed investing is an option for you.

What To Look For in Trust Deed Investments

Trust deed investing doesn’t require a high tolerance for risk to be successful. Although there are risks involved with all real estate investment opportunities, there are particularly higher risks if you haven’t first done your due diligence on the borrower, the property, and the terms of the agreement. Many companies acting as the trustee will also have a vetting process, but you’ll still need to have your own as added insurance. 

Vetting the borrower’s investment background is usually a good place to begin, especially if you’re sourcing deals yourself. 

Borrower’s background: 

• Request information from previous real estate projects.
  • Were they profitable? 
  • How did they handle changes in the market? 
  • Have they been foreclosed on? If yes, why? How many times has this happened? 
• Ask for referrals, or connect with mutual contacts to get a better feel for the borrower’s experience with real estate.

If you’re working with an investor group or brokerage firm, checking into the borrower’s background with real estate may not be as critical. When working mutually with a broker, chances are they’ve already scoped out the borrower’s credentials. With investor groups, you may still want to do some digging – on both the borrower (if this hasn’t already been done by the group) and those you intend to pool money with. 

Next, thoroughly evaluate the contract you’ll be signing. 

Agreement conditions & property information: 

• Is the loan-to-value (LTV) 65% or less? If so, you’re more likely to remain profitable if the borrower defaults.
  • Is it a small loan on a low-valued property? Generally, $100,000 or less on a property valued at less than $200,000 would fit this description. Small trust deed investments can hold more risk, even if the LTV is less than 65%. One of the main reasons for this is potential legal fees and other costs that can occur in case of default, reducing the overall margin of safety. 
• What is the loan’s maturity date? If you need this money before the set maturity date, you may want to look for other opportunities or negotiate a different timeline. 
• Does the title of the property have any outstanding liens or anything else that could be an issue?
• Is the value of the property comparable to those in the area? It doesn’t hurt to visit the property in person as well. 

While it’s not likely to happen often, some real estate deals go sour for reasons your due diligence check couldn’t have predicted. No matter what type of trust deed investing it is, if something about it feels off, it’s best to seek out a different deal. In general, however, doing your due diligence should highlight concerns before it’s too late, or reinforce your decision to invest in a particular opportunity.

Frequently Asked Questions

There’s a lot to know about trust deed investing and much of it you can learn through the process of doing. However, below you’ll find frequently asked questions by other real estate investors that can help give you a more robust picture of this investment type before you get started. 

Are trust deeds safe?

There is risk involved with any real estate investment. The nature of trust deed investments allows you to generate passive income and be hands-off when it comes to the actual property – freeing you of time, responsibility, and stress. When evaluated correctly and thoroughly, trust deeds can be a sound and safe investment. 

Before jumping into any real estate investment opportunity, research the property (as in-depth as possible), the terms of the contract or agreement, and who you’ll be doing business with. 

Why do lenders prefer a deed of trust?

Typical foreclosures can be a lengthy process with expensive legal fees. With a deed of trust, the investor or lender doesn’t have to process a foreclosure through court, therefore making it easier to end the investment agreement and mitigate any losses. 

What happens when a deed of trust is paid off?

Once the initially agreed upon loan is paid off, the borrower will be given the title to the property and will be the new legal owner. The lender will have received their money back in full.

Are trust deed funds or individual trust deeds better? 

This is generally a personal preference. Real estate investors who prefer a hands-on approach will appreciate individual trust deeds, as there’s more room to do individual research on the particulars of the agreement and adjust key points as needed. Investors who prefer a hands-off approach may appreciate trust deed funds more since much of the work is done for you. 

Trust deed investing can be very lucrative with the right partnerships and properties. Contact Revolution Realty Capital today if you’re ready to form a trusted partnership on your road to maximizing investment profit.