Every investor has to strike a balance between risk and reward. It’s not a one-to-one equation — different investment vehicles attack this problem in different ways.

Maybe you have heard of “trust deed” investing. What is it, what are the risk/return characteristics, and how do you decide if it’s right for you? Let’s clear up the confusion — identify what trust deed investing is, and the pros and cons of this investment strategy.

What Is Trust Deed Investing?

“Trust deed” is short for “deed of trust,” which is one of the two components of a mortgage loan. (The other component is the “promissory note” or “note,” which sets out the terms of the loan.)

The trust deed establishes the borrower in a mortgage transaction as the “owner” of the property. They own it on paper, not the lender. 

What the trust deed does is establish a lien on the property — a legal encumbrance that entitles the owner of the lien to foreclose and seize the property if the property owner fails to meet certain conditions. In the case of a mortgage, those conditions are the borrower paying back the loan as agreed.

When you invest in a trust deed, you buy the right to collect those mortgage payments and seize the property through foreclosure if the borrower defaults. You can do this by originating your own loans, or buying the rights to loans from banks, brokers, or other investors. 

Essentially, you are assuming the position of the bank in a mortgage loan, not the borrower. Cool, right?

Pros of Trust Deed Investing

• Attractive Yield. Trust deed investors often get a high single-digit or low double-digit yield, beating inflation and most “fixed-income” investments. They do this by offering fast, convenient credit to higher-risk borrowers who don’t fit in the “box” for a Fannie Mae mortgage; or by buying notes at a discount.

• Relatively Easy Due Diligence. Property records and appraisals are fairly easy to access. It’s much easier than, for example, evaluating the prospects of corporate stock or bonds.

• Passive Cash Flow. Once you hand over payment collection to a loan-servicing company for a small fee, trust deed investing yields truly passive income — no other expenses, plus no toilets to fix.

• Secured By Real Estate. Unlike with stocks and bonds, there is actually some collateral to your investment — the real estate itself. With a little due diligence, you can make sure your trust deed is backed by property of higher value than your initial investment.

Cons of Trust Deed Investing

• No Appreciation of the Principal. When you buy real estate, you have equity, which gives you exposure to the appreciation of the property. Trust deed investors don’t get that unless they foreclose. The note balance is the maximum cash out value of the investment. 

• Less Liquidity. A publicly-traded stock or bond is easy to liquidate on a public market. If you need cash, you can have it practically the same day. With a trust deed, you need to find a buyer for the investment on the secondary market. This can take time — which can be a problem if you find yourself in need of fast cash.

• Not Idiot-Proof. Trust deed investing is not rocket science, but there is a learning curve — a new skill set to acquire to find investment opportunities and evaluate them. 

Want a professional partner to help you find and evaluate trust deed investment opportunities? Reach out to REID Lending Partners. We help investors beat the learning curve and add high-yield, low-risk trust deed investors the easy way.