If you’re looking for a passive income stream, consider trust deed investing in California. This investment option gives you a reasonable degree of certainty, unlike volatile stocks or other fluctuating alternatives. However, before investing, you must understand how trust deeds work and your specific role in the entire transaction.
What Is Trust Deed Investment?
Investing in a deed of trust means you’re putting your money on a real estate-secured loan for monthly interest. In this arrangement, you lend money to a commercial borrower introduced to you by a trust deed broker. The broker protects your investment interests by performing due diligence on the borrower and the project and holding on to the title lien until the loan is fully repaid.
Why Do Trust Deed Borrowers Choose This Lending Option?
Most large and small banks don’t usually prioritize loans for mid-size commercial real estate projects. The segment of developers left out by traditional lenders is compelled to seek out alternative sources of finance. Trust deed loans suit their preferences in ways such as:
- Swift evaluation (instead of waiting 90 days)
- Trust deed brokers offer flexible, viable eligibility criteria
- Availability of short-term loans
How Trust Deed Brokers Evaluate Projects
Your trust deed broker will underwrite each project. This process entails an evaluation of the property’s value with respect to market dynamics and the borrowers’ financial position. The more equity the borrower has in the property, the lower the risk of default.
Importance of Underwriting for Investors
Underwriting is meant to protect you, the investor. If the borrower is capable of repaying the loan, the risk for you is lower. The evaluation process also determines whether the property can easily be sold to recover investor funds should the borrower default.
How to Assess Project Risk Factors
The Loan-to-Value (LTV) ratio is a crucial risk assessment tool for secured real estate loans. It compares the loan amount to the value of the equity securing the investor funds. Therefore, a low LTV ratio, such as 50% or lower, provides more investor protection.
Other ways to assess trust deed investment risks are:
- Loan amount and duration
- Property characteristics
- Interest rate
- Guarantees, if any
- Borrower history
Your Role as an Investor
Your primary role is to provide funds for the loan as an individual or part of an organization, like a pension plan, trust, or corporation. Your trust deed broker will provide key fact sheets on the property, but you should carry out your own feasibility research on the project.
Once you’ve selected a loan option to invest in, make sure to conduct independent due diligence on the property in question. Important considerations to ascertain the safety of your investment include:
- Visit the site of the project
- Review the borrower’s past financial performance
- Search County recorded documents for more information
- Take into account interest rates stability
Recording a Deed of Trust
As the investor(s), you’ll receive copies of legal documents pertaining to the trust deed investment. These include:
- The recorded trust deed
- Title policy
- The property’s insurance
- Executed promissory note detailing the interest rate, payment amounts, and loan terms
The note also includes the borrower’s undertaking to pay the investors the loan amount and interest.
When Do You Receive Your Interest?
Immediately after funding the loan, investors start receiving their monthly interest. The money is sent to the specified investor account.
These are the most fundamental concepts and processes to keep in mind when considering trust deed investing in Los Angeles, CA. If you’d like to invest with Fidelity Mortgage Lenders, contact us or give us a call at (800) 752-9533 today. We’ll expertly guide you in making a smart trust deed investment!