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Risk Associated with First Trust Deed Investments

First Trust Deed Investing Risk

No investment comes without risk. We want to help educate you on how to protect your trust deed investments with the following:

  • How to leverage the right project you invest in
  • Value in the Project
  • What Trust Deeds Make Sense
1
What is the margin of safety in a trust deed investment?

The difference between the overall loan amount and the value of the underlying property is what creates the margin of safety. Simply stated, if the borrower does not meet the terms of the loan, the lender has the right to foreclose on the property and resell it to recover the initial investment as well as any interest that is past due. If a loan is conservative, meaning that the value of the property is high compared to the loan amount, the investment should not lose money regardless of the borrower’s default on the loan. If a trust deed investment is sufficiently structured, then your loan should be protected by the property.


2
What are the disadvantages and risk associated with trust deed investing?

Because a trust deed investment is not considered liquid, an investor cannot quickly cash out the investment as they would a municipal bond or share(s) in a blue chip company. Willingness to commit to the investment until the loan has been repaid by the borrower, default occurs, or foreclosure ensues and the property is sold is key.

Capital appreciation within trust deed investing is slim to none. Generally the returns entitled to the investor will be generated from interest income from the loan. Due diligence must be given when assessing deals and identifying borrowers as well as the property itself. Without special skill and knowledge sets acquired by the investor, success will be evasive.

Trust deed investments do not come at no risk. As previously mentioned, if due diligence is not enacted miniscule flaws or miss-steps will cause a trust deed investment to become high risk. If a borrower or other interested party is able to make a valid claim through litigation that a trust deed instrument is not correct or appropriated properly, or that there is interest in underlying property equally or more valid, trust deed investors could find themselves in a legal battle to maintain and protect their investment.

Investing of this nature is not suited to fickle or undedicated people. Inexperienced investors will do well to take extra precaution and care to seek excellent advisement and guidance from experience and trustworthy investors. However, tens of millions of legitimate trust deeds are owned by banks as well as thousands upon thousands of private investors. It is not extenuating science to create a legitimate trust deed and accompanying note.


3
What returns can trust deed investors expect?

Reports from 2011 show that investors received returns of anywhere from 9%-12% on trust deed that had solid margins of safety. For professional trust deed investors the returns were higher because of the frequency of their investing and their close relationships with mortgage brokers and banks that provide trust deed opportunities.

First Trust Deed Investments

Additional Questions and Answers

Most trust deed investors are reliant on brokers for the presentation or identification of investing opportunities. Along with this, many investors receive help from the brokers for the performance of some of the due diligence given on a loan.

Nothing is wrong with sourcing investments through brokers so long as it is not expected that key tasks particularly when it comes to due diligence, are not performed by the broker. While brokers are not all together disinterest parties, they generally work on commission and are motivated to broker as many loans as they can. There are brokers who are interested in the best for their clients, but it is not their job to evaluate the risks of deals. The responsibility lies with the individual investor to differentiate risks of a given deal- this requires a specific knowledge base. Brokers can be great sources of information, allies, and places to source trust deed investments for the savvy real estate investor.

Due diligence comes with 4 large areas which are required for effective trust deed investment. 1) Value and property assessments; 2) the borrower in question; 3) legal items; and 4) items such as the broker/ intermediary if this is part of the investing scenario. If all four areas clear out appropriately, a trust deed is safe. Each area is addressed in separate FAQs.

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