Benefits of Trust Deed Investing

Would you like to earn a higher interest rate on the money invested in your bank account? If so, then Trust Deed Investing may be an option for you. What is Trust Deed Investing? When you invest money in a trust deed, you become a lender, much like your bank. The trust deed itself is a document used to secure a loan, using a home as collateral. The loan specifics are written in the promissory note. There is also an interest rate attached to the loan.

There are three parties involved in the trust deed: the beneficiary (lender/investor), the trustor (borrower), and the trustee (independent third party selected by the beneficiary who holds the property title until the trust deed is repaid).

The process of Investing in Trust Deeds works as such: a deed of trust is drawn up and recorded against the trustor's property title. This secures the investment made by the beneficiary. The trustor then transfers the property, in trust, to the trustee. This trustee holds the property title as security on behalf of the beneficiary. From here, one of these steps is taken:

The trust deed is returned to the beneficiary once all conditions outlined in the promissory note are satisfied.

The property is put up for sale (foreclosed) because the trustor defaults on the loan. Should a foreclosure occur, the investor attempts to obtain either the title or a third party buyer for the property. This usually satisfies the debt owed to the investor.

There are several differences between a mortgage and trust deed:

There are only two parties involved in a mortgage: the lender, and the borrower. In a trust deed, there are three parties: the lender, the borrower, and the trustee. In the event of a mortgage foreclosure, state law determines what foreclosure process will take place. Oftentimes, the process can be quite lengthy and involve the judicial system. A trust deed foreclosure does not usually involve the state, making it much quicker.

The advantage of Trust Deed Investing is that you may obtain interest rates of 8-12% on your investment, exceeding the interest rate of a typical bank account. However, there are several items to keep in mind:

Always physically inspect the property in which you intend to invest, even if the property is already vouched for by an appraiser or title company. If needed, contact a realtor for information on the property, its current value, and sale prices of comparable properties. Read the appraisal too.

Find out exactly how the trustor intends to pay back the loan. It also helps to know for how much initial loan money the trustor has been pre-approved.

When making the loan, the Loan to Value (of the home) Ratio needs to be considered. You should never lend out an LTV that is greater than 60%. If the home is not owner-occupied, the LTV should be no higher than 50%.

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