Whether you’re looking for opportunities to diversify your portfolio or short-term financing for a real estate project, trust deed investments offer distinct advantages. As with any financing, trust deeds also include a certain amount of risk. Understanding the balance of both can allow you to make informed decisions about your options.
Advantages of a Trust Deed
In many cases, trust deeds are financed by a private investor acting as beneficiary (lender). A third party (trustee) holds legal title to the property as security for the loan. This unconventional structure offers benefits to both borrowers and investors.
Private lending allows for more tailored financing terms, from the repayment schedule to interest rates and additional provisions. This flexibility offers borrowers a significant advantage over the strict requirements of conventional lending. Trust deed investments can also be a unique vehicle for portfolio diversification that suits your personal goals as investor.
The property leveraged as collateral in a trust deed secures the loan. This protects the lender’s investment while allowing the borrower access to financing.
Asset-based loans, like trust deeds, enable more favorable terms than unsecured loans because they prioritize the asset's value over the borrower’s credit score. If the borrower fails to repay the loan, the lender can initiate nonjudicial foreclosure proceedings to sell the property and recover their investment.
The term length of trust deed investments is much shorter than a traditional mortgage, which can benefit borrowers investing in real estate for quick turnarounds, like fix-and-flip and rental properties. The limited term also positions investors for reliable, passive income with strong rates of return. The rate will vary depending on the specific terms of the trust deed.
Disadvantages of a Trust Deed
The real estate market can be unpredictable, but historically, real estate is less volatile than stocks as a tangible asset. Determining the risk-reward tradeoff of trust deeds will come down to your goals.
Risk of Default
For borrowers, if financial circumstances change, default on repayment can result in property foreclosure. Late payments should be avoided to prevent escalation and property loss. An asset-based loan can increase financing access but doesn’t increase your capacity to sustain debt. It’s important to avoid taking on more than you can manage and ensure terms are favorable and realistic.
For investors, delinquent payments or default of the trust deed can disrupt returns. This may require foreclosure proceedings to recover capital by selling the property. Although nonjudicial foreclosure offers faster recourse than conventional mortgage foreclosure, it can still take time. The risk of default can be mitigated by lending to borrowers with a successful history of repaying their debts.
As a private financing agreement, a trust deed requires loan servicing and can’t be liquidated like stock. When necessary, the promissory note can be sold to regain capital and reinvest elsewhere, but liquidity is not instantaneous.
The Advantage of Expertise
For investors, trust deed investing offers high-yield passive income, and for borrowers, it offers quick financing for real estate investments. More than a simple equation of pros and cons, trust deeds strike a complex and compelling balance.
If you want to dive deeper into your options, don’t hesitate to get in touch. At Val-Chris Investments, our team has decades of experience in private money lending and real estate investments to ensure every client can secure their future with confidence. Contact us to learn more about trust deeds and take the next step toward your financial goals.