Many investors are eager to diversify their portfolios and reduce market risk with real assets. Even non-correlated investments like real estate include risk, although they are comparatively more stable than traditional stocks. For those considering alternative strategies that trade liquidity for passive income, trust deed investing can be a lucrative opportunity to make risk-adjusted returns.
What Is Trust Deed Investing?
Trust deed investments are real estate agreements that use the property title as collateral to secure private financing. In this transaction, a private investor provides capital to facilitate a property purchase, refinance, or development. The borrower will add value to the property and repay the investor’s capital over time while enjoying the benefits of ownership.
In many states, trust deeds are used as an alternative to a traditional mortgage. The most important distinction is that a trust deed includes a power of sale clause. This works to the benefit of an investor because it authorizes sale in the event of default to recover the trust debt.
How Do Trust Deeds Work?
Functionally, a deed of trust is similar to a mortgage or home loan in that a property is leveraged as collateral for debt. The terms “mortgage” and “trust deed” are used interchangeably, but they are not synonymous.
A deed of trust allows for nonjudicial foreclosure, which can be faster and less expensive than traditional proceedings in court. Trust deeds also involve three parties rather than two: the borrower (trustor), beneficiary (lender), and trustee.
- The borrower signs a promissory note outlining the contract terms, their intent to repay the principal debt with interest, and any other requirements put in place by the lender. This transfers the property title to an independent third party (trustee) until paid in full.
- The beneficiary provides the capital financing and is named on the deed of trust or assignment as a lender to protect their investment. They receive interest payments according to the contract terms, and their principal investment is returned in full when the deed of trust is paid off.
- The trustee facilitates the transaction and is named on the conditional property title. Typically, the trustee is a bank, insurance company, or otherwise neutral broker to service the deed of trust. Once the debt has been repaid, the trustee transfers the property title back to the borrower.
How to Invest in Trust Deeds for Passive Income
Although trust deed investing carries a certain amount of risk—as any investment does—it also offers favorable rates of return, paid monthly as interest throughout the financial agreement. The primary avenues to begin investing are individual trust deeds and mortgage funds. Your rates of return will depend on your strategic approach and risk profile.
Advantages of Trust Deed Investing
- High-yield returns
- Recurring revenue
- Portfolio diversification
Disadvantages of Trust Deed Investing
- Not federally insured
- Risk of non-payment
Trust deeds are secured with real property, making them an excellent way to diversify your portfolio. However, they cannot be converted to cash on demand without another investor willing to take over your lien. Trust deeds through private lending are not federally insured, although nonjudicial foreclosure creates a strong position to quickly recover the capital investment through a sale if a borrower defaults.
When underwritten conservatively, trust deed investing can offer stable returns that allow you to reinvest or manage your profits predictably. It’s always in your best interest to conduct due diligence on investments to understand and assess the risk involved.
There are numerous ways to minimize the risks of trust deed investing—including title insurance—so you can make confident financial decisions. A reputable trust deed investment company will be able to offer comprehensive loan servicing and regular investment opportunities so your capital doesn’t stop making money when a deed of trust has been repaid.
Discover Your Next Investment Opportunity with Val-Chris
Choosing a servicing provider is a significant decision, and with more than four decades of investment expertise, we’re ready to answer any questions you may have.
At Val-Chris Investments, we proudly offer specialized lending services with the highest-quality service for our clients. If you appreciate the value of consistent, secure income, contact our team to learn more about trust deed investing opportunities.