Trust deed investing can involve different investment vehicles, as well as different funding sources.
Individual Trust Deed Investing
This type of trust deed investing refers to an investor that fully funds a loan on one particular property. As the note is paid, the investor receives the return at the interest rate in the note.
One benefit of this type of vehicle is that the investor can receive the full amount of return on the note. Individual trust deed investing may also appeal to an investor who wants to invest in a shorter-term project, such as funding a note with a six-month maturity.
One of the risks associated with individual trust deed investing is the lack of diversification. Since the investor’s entire investment is secured by a single property, the investment holds more potential risk as opposed to an investment spread over several properties.
Another challenge to whole deed investing is the limitation on investment funds. When dealing with whole trust deed investments, a single investor must have sufficient capital to fund the entire loan amount in order to purchase a whole trust deed. Individual investors may have insufficient funds to act as the sole funding source for a larger loan.
This type of investing refers to a group of investors, each funding a percentage of the total amount. For example, if a borrower required a $1 million loan, the note may be fractionalized into 10 different investors, each contributing $100,000, thus each investor would own 10% of the transaction. All 10 investors would be vested on the recorded security document and they would share in the profits based on percentage of initial contribution.
Fractionalized investing can permit investors with smaller amounts to participate in an investment because they are combining with other investors. However, fractionalized investing can present significant problems if there are disputes between multiple investors concerning the disposition of the property. Each investor is a vested partial owner of the note and trust deed. Since they jointly own the investment, the group of investors must come to an agreement whenever there is a question of how to proceed in the event of a default.
This is also referred to as a “mortgage pool”. This method allows investors to combine their investment funds together to invest in multiple transactions, similar to mutual funds that invest in a variety of stocks.
The fund gives investors the advantage of diversification. When an investor purchases shares of the fund, they obtain a proportionate interest in all of the loans in the fund. Interest earnings from the loans in the fund are typically passed directly to investors, who can choose to receive distribution checks or reinvest the monies back into the fund. Investors in the mortgage fund are not required to advance monies or deal with any properties reverting to their ownership, as the fund managers handle these events.
With fund investing, one particular investor does not have to fund an entire loan on his/her own. This allows more investors to participate in smaller amounts than with individual deed of trust investing.
In addition to diversification and ease of entry benefits, many investors prefer fund investing because of the ability to fund the investment through a variety of sources. In addition to investing with individual funds, many trust deed funds will allow investors to invest through other accounts and entities, such as an investor’s IRA, trust, pension plan, LLC, corporation, etc.
Funding with Retirement Accounts
In addition to investing in trust deeds with their own individual funds, investors can invest through their corporate entities, trusts, and various retirement accounts with significant tax-saving advantages. This allows investors to take advantage of the higher returns of trust deed investments through their tax-sheltered retirement accounts.
Want to Learn More?
Wise investment decisions are only made when all the available information is at your fingertips. Whether you’re interested in individual, fractionalized or fund investing as part of your portfolio, ICCG is available to ensure your unique goals and needs are fully met. We invite you to contact us to learn more about our services and investments.