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Frequently Asked Questions
(805) 527-9282
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What kind of Trust Deed investments are you offering?
I typically offer 1st Trust Deeds which earn about 14% per year secured by residential property located in Southern California. Additionally, I occasionally offer 2nd Trust Deeds paying even higher returns. All our Trust Deeds finance the undervalued purchase and rehabilitation or new construction of residential or commercial properties. Years ago, I established a good reputation with the Southern California community of wholesale residential buyers and their brokers. I did this by working personally with borrowers and coaching them to greater profits and serving them with fast, easy loans creatively customized to fit their particular situation. Consequently, today my lenders and I participate in a continual supply of high-yield, well-secured Trust Deed investment opportunities.
What about investing in Trust Deeds in a soft or declining Real Estate Market?
What is so great about Trust Deed investing is that it can be profitable no matter which direction the market is going. As long as the borrower is buying the property at a price that is significantly less than its improved and completed short term value, the investment can be well secured. During the depressed market of early to mid 90's when real estate was definitely going down, both our borrowers and lenders made lots of money. When everyone is running away from real estate, it is an excellent time to invest in the diamonds in the rough. This is one of your specialties and that is why we are excited that the current market is filled with profitable opportunities.
Why would a borrower seek a loan at 14% per year unless they are poor credits risks?
Many institutional and government loan programs are just too slow or unavailable for even the best qualified of these wholesale borrowers. What this has meant for Trust Deed investors is that very good 1st Trust Deeds are being sought by these borrowers who need fast, easy, short-term private financing in order to close deals. They are willing to pay lenders higher interest rates so they can obtain the funds fast and without the run around often experienced from institutional lenders.
One typical example of this is of an entrepreneur who is buying a bank repo. She is paying $210,000 for the single-family home property which, when rehabilitated in about six weeks for about $25,000, can be sold for $350,000. She is anticipating over $65,000 of net before tax profit from the sale of the home. (I have some borrowers who do several of these per month - not a bad way for them to make a living.) She easily qualifies to obtain a low interest bank loan, however, the seller wants a 15-day closing. So an institutional bank loan is usually out of the question. She'll lose the deal unless she acts fast. With a $65,000+ profit in the wings, almost any interest rate is reasonable. Paying 14% for an easy, fast private cash loan is no problem and, for her, it's just like using a credit card.
How much do I need to start investing in Trust Deeds?
Most loans that I fund fall in the range of $50,000 to $500,000. I select all loan opportunities with the thought that I personally will be investing in it. You might say I believe in putting my money where my month is. If I recommend it, I want to be in it too, so I participate in almost every loan opportunity in which you invest. Therefore, most often each loan will be divided (or "fractionalized" as it is called) among myself and one or more of my clients. Although most investors have at least $50,000 in any one investment, sometimes I can offer an opportunity to someone with as little as $20,000 to $30,000 to begin investing in Trust Deeds. I usually limit most loans to five investors or less, and often there are only two - my client and myself. I am there throughout the duration of the term of the loan to monitor its monthly payments, property improvement and payoff. All you have to do is open the check envelopes that come to your mailbox.
Why hasn't my financial advisor ever suggested Trust Deeds as part of my investment plan?
Most financial planners and personal finance writers have been primarily trained in stocks, bonds, and insurance products. Planners who sell investment products usually have a security or insurance license which allows them to sell only these products. Very few ever have a real estate license. Surprisingly, even most real estate licensees have very limited knowledge about the private money Trust Deed market. It is, therefore, not surprising that Trust Deeds have been called the "best kept investment secret" by some financial writers.
You'll notice that whenever you see advice from a personal financial planning article about asset allocation, the advice rarely includes any mention of real estate, let alone Trust Deeds. This is a disservice to investors because real estate investment is the number one wealth builder in the world.
In terms of asset allocation and investment diversity, you can look at Trust Deeds somewhat like bonds. They are both debt obligations and income generators. Bonds have an advantage of being readily available from almost any securities broker and are frequently written about. Trust Deeds have an advantage of usually having higher income rates, are secured by protective equity, and their performance is more controllable by the investor.
If I invest in a high interest Trust Deed, how long is my money tied up?
Private money Trust Deeds normally have short terms. Most loans I offer have a one year term. Most of these loans never run the full year as my loans currently have an average payoff period of about eight months. Frequently, investors end up earning a prepayment penalty fee which boosts their earned interest rate on the investment. For example, a common scenario would be a one year, 1st Trust Deed paying 14% interest which is paid off after three months. If the loan calls for four months of guaranteed interest, as my loans do, then an additional month's interest would be earned. This means that you, the investor, will receive back the loan principle, the three months of earned interest, plus one additional month of interest. In this example, the effective annualized earned interest would then be 18.67%.
Although most loans in the loan portfolio of this office are repaid within the term of the loan, some loans have run two or three times the loan term. As real estate and Trust Deeds are not immediately liquid assets, there is no guarantee when this loan will be repaid. It is the policy of this office to allow loans to continue, on a month to month basis, beyond the maturity date provided the loan is either in good standing or there is some practical reason determined by this office for the benefit of the beneficiaries to not call the loan due and payable.
What are the risks of investing in the Trust Deeds which you offer?
There are always a number of risks associated with any type of real estate related investment. Although the 1st Trust Deeds which I offer are secured by the completed property project, the extent of that security depends on several factors including, but not limited to, 1) the state of completion of the originally planned real estate project and 2) the condition of the real estate market at the time of payoff or liquidation. Unpredictable changes in the real estate market or failure by the borrower to complete the planned project can certainly delay or negatively affect the reliability of the monthly payments, the timeliness of the loan payoff, and/or the security of the investment. Additionally, should investors have to take back the property by foreclosure, there will be foreclosure expenses and expenses in preparing the property for eventual sale.
How liquid are Trust Deeds?
There is a rather vigorous secondary market for Trust Deeds. Look at almost any "trust deeds for sale" or "real estate loan" section of most newspapers. Most all Trust Deed investors, however, never want to sell their Notes for two reasons: 1) the Notes earn high income when compared to the low interest earned from bank or money market accounts 2) the Notes are relatively short term and investors choose to hold them to maturity.
Can I use my IRA, 401K Rollover, Family Trust, or Defined Benefit Pension Plan to invest in Trust Deeds?
Yes, you can. Contact us to find out how to do this.
What is the actual procedure for making an investment in the trust deeds you offer?
First, I will meet with you to answer all your questions regarding investing in trust deeds. Next, if you decide you would like to be involved owning trust deeds, you will let me know your investment budget. Then, I will contact you with specific trust deed investment opportunities. After your approval, I will send to you the appropriate loan information and the instructions for wiring your investment funds into escrow or title. Within a week after you fund your portion of the loan, you will receive a "Green Package" from me which includes copies of the loan documents and a letter from me again confirming the date you can expect to start receiving payments.
Do you have a Trust Deed Investment question that you would like to see answered here or one which you would like to have me answer confidentially? Please send your questions to us.
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