Trust deed investing involves an investor lending money to a borrower through a private loan. The borrower—typically a homebuyer or developer—will then use the investor’s capital to add value to a property. To protect their investment, the investor’s name is on the deed of trust. The trust deed ensures that the property is used as collateral. When looking at this type of investment for your portfolio, you need to understand how the lending and borrowing processes work and consider the potential advantages and disadvantages. This will allow you to make better and more informed decisions.
What Is Trust Deed Investing?
In trust deed investing, an investor lends money to a borrower through a private loan. The borrower generally uses the funds to invest in their business for business purposes, to buy a rental property, or even to pay off business debt. The investor’s name is recorded on the title as the beneficiary to protect their investment. The recorded trust deed ensures that the property is used as collateral.
Like any type of investment, trust deed investing assumes some risk surrounding non-payment and loan-to-value ratios. The recorded deed of trust protects an investor’s lien position, but not the risk involved with the investment. Let’s take a closer look at some important components of trust deed investing.
The Essential Elements of Trust Deed Investing
These are the essential elements of trust deed investing:
A deed of trust is an agreement between the borrower (trustor), the lender (beneficiary), and an independent third party (trustee). The trust deed secures the investment against the identified property.
The third party entrusts the property’s deed until the borrower can pay the loan back in full. Once the loan has been paid back, the borrower can take ownership of the title of the property. However, the trustee will convey the property if the borrower defaults.
Collateral refers to an asset that’s pledged by a borrower to secure a loan. In trust deed investing, the property is generally used as collateral.
The loan-to-value ratio measures the total amount of a mortgage against an appraised property’s value. In a purchase loan scenario, the more money the borrower puts down, the lower the loan-to-value ratio.
The interest rate refers to the percentage of a principal loan that’s charged to the borrower. Because this type of private loan is significantly shorter than a traditional mortgage, its interest rate tends to be much higher.
Loan servicing includes all the administrative duties involved when originating a loan—from the disbursement of funds until the loan is paid off. Loan servicing includes any payment statements, the collection process of monthly payments, record maintenance, the collection and payment of taxes and insurance, escrow, and dealing with any delinquencies or late payments.
Due diligence is a detailed assessment of a borrower’s current economic and financial standing. This may include their credit score, loan risk, and loan term sustainability.
While the foreclosure process can vary from state to state, it may begin anywhere from three to six months following a missed payment. If you partner with Val-Chris as your lender, our late fees are assigned 10 days after the first missed payment. If your payment is due on the first of the month, the late fee will apply on the 11th day.
More Than Four Decades of Investment Expertise
As a trust deed investment company, Val-Chris Investments proudly funds first, second, and third deeds of trust on California real estate property, with loan amounts between $25,000-$6,000,000.
For trust deed buyers, our experienced and efficient loan servicing department also provides the loan servicing you require for a small fee. While any investment comes with some risk, our investors have typically earned secure, high-return yields on quality investments.