Trust Deed Investing – Why Invest in Trust Deeds?
The Lure of Trust Deeds
Investors that pursue trust deed investments are attracted to them because of four primary factors:
1. They offer a way to diversify their investment portfolio
2. They generate regular income
3. They minimize risk
4. They typically produce a more consistent rate of return than traditional investments in stocks and bonds
Consistent Higher Returns
When compared to fixed-rate bond investments, which are subject to fluctuations due to changes in interest rates and the economy, deed trust investments offer more consistent returns. In essence, trust deed investing is similar to investing in a bond with a fixed yield and pay-off at maturity. For example, if you, as an investor, loan $100,000 to a borrower at 10% interest and require interest-only payments, you would receive $10,000 in interest income per year. Absent any default, the loan would pay off at or before maturity, and the original principal would be returned.
Demand for Private Loans
Today’s economy has generated a consistent demand for specialized loans, which produce higher yields for investors. Real estate developers and investors have limited access to traditional lending sources. As a consequence, loans offered by private trust deed investors demand higher interest rates, as well as lower loan-to-value ratios, to protect the investment. This results in higher returns with less risk.
The Advantage of Deed of Trust Security
Trust deeds can yield higher returns than stocks, with less risk. This is because trust deed investments are secured by tangible real property – houses, buildings, acreage, etc. Moreover, borrowers have a great deal to lose from defaulting on a secured loan. The risk of losing the property provides strong incentive to keep current on payments.
Diversification of Investment Portfolio
There are a number of reasons investors embrace trust deeds. The first is diversification. Because trust deeds are fixed-income, real property investments, they are attractive to investors seeking ways to divide investments between equities, such as stocks, and fixed-income investments, like bonds. Trust deeds also provide the opportunity to invest in the real estate market, which when done well, generally delivers considerable returns. Smart investors look for different sectors of the economy in which to invest, such as agriculture, technology and real estate.
Investment Type Comparisons
Investment Options Collaterial Expenses Risk Factor Estimated
|Money Markets||Bank Secured & FDIC||Varies||Low||.01 – 1.5%|
|Cert of Deposit||Bank Secured & FDIC||None – early withdrawal penalties||Low||.05 – 4%|
|Bonds||None||Commissions + Fees||Mod||Varies by Market Condition|
|Stocks||None||Commissions + Fees||High||Varies by Market Condition|
|Trust Deeds||Real Estate low LTV||None||Low-Mod||8% – 12%|