It might seem like a David vs. Goliath situation if you’re just beginning your trust deed investing research and eyeing the mountain of information that is real estate investing. Still, you can take a breath of relief.
We’ve made it our mission to share with you our resources and insider information to equip future investors with the necessary knowledge to tackle any financial endeavor they decide to go on.
To get ahead in the real estate investing game, it’s critical to have a resource toolkit like this guide to look back on when you begin your investment portfolio.
Trust deeds are just one form of short-term investing that can provide financial relief for you and your family, this low-risk high-return form of real estate investment is perfect for beginning investors looking to dip their toe in the world of real estate!
With this article in your “toolkit”, you’ll be able to understand what a trust deed is and what the fundamentals of trust deed investing entail.
On top of that, we’ll teach you the steps of actually investing in a trust deed, and what the main differences are between a trust deed and a mortgage.
If you're looking for more personalized information, or you already know about trust deed investing and you're looking for a lender to help you with the next steps. Feel free to reach out to one of our PMA Partners and we'll help you with each step of the process!
There’s a lot of ground to cover! So let’s start climbing the mountain that is Trust Deed Investing.
What’s a Trust Deed?
Simply put, a Trust Deed (also known as a Deed of Trust, a title deed, or a bill of sale) is just a piece of paper (or multiple pieces of paper) that classifies as documented proof of a real estate transaction. A Trust deed works as a replacement for a mortgage investment.
Unlike a mortgage transaction that has 2 parties of people involved, a trust deed real estate transaction requires a total of 3 parties involved in the deal: the borrower, the lender, and the trustee.
The additional third party that’s known as “the trustee” holds the home’s title until the loan is completely repaid within the payment period.
The trustee (which is usually a bank, escrow company, or some type of title company) should be a completely neutral and non-biased asset to the transaction, and if the loan is paid in full within the correct amount of time, the trustee has two duties:
- The trustee will pay the lender the proceeds of the sale if the trustor decides to sell the property before the loan is fully paid off.
- If the loan is fully paid off by the end of the term, the trustee will dissolve the trust and transfer the legal title to the trustor.
But, what happens if the borrower stops paying and defaults on the loan?
That’s the beauty in trust deeds! Having a third party (the trustee) makes the foreclosure process swift and provides a low risk for the lender.
In the case of default on the loan, the trustee (mortgagee) is responsible for initiating foreclosure, whether with or without judicial permission as required by state law.
Understanding the details of what a deed of trust document contains is essential to your “toolkit”.
Make sure you have a good foundation to stand on because in the next section we’re going to teach you how to put your trust deed into action!
What Is Trust Deed Investing?
It’s critical to understand that trust deed investments are categorized under Bridge loan programs, meaning that these loans are short-term in length, typically 5 years or less.
Most trust deed investments are given to professional real estate developers or investors due to the fact that the loan itself has a concise amount of payback time.
To really define trust deed investing in simple terms, you should view trust deed investing as just investing in loans that are secured by real estate.
They are very similar to mortgage loans process-wise but do have specific differences between the two which we will cover in a later section down the line.
Here’s how it works:
Some professional real estate developers specialize in flipping houses, repairing them, and reselling them for a profit
Banks are reluctant to lend to these developers for several reasons, so the developers look for alternative lending options.
Trust deed investors fill this gap in the market by offering the short-term loans the developers need. In return for making these loans, trust deed investors can earn attractive returns with relatively low risk.
To get a deeper understanding of trust deed investing, you should know that there is the possibility to have multiple trust deeds on a single property.
This is where it gets a little confusing but stay with me…
First Trust Deed
The first lien on the property used to secure the loan is known as a first trust deed (or first deed of trust). The first trust deed gets priority over all other trust deed holders in the event of a default or foreclosure sale.
For example, if you invest in a first trust deed on a property and the borrower stops making payments, you can foreclose on the property and sell it to recoup your investment.
This process wipes out the second trust deed, meaning the second trust deed holder's investment is now worth zero.
Second Trust Deed
The second deed of trust means that there is already a loan or lien on the property, called the first deed of trust.
The second deed of trust is in a junior position to the first loan and has many special considerations for borrowers as well as lenders. Second Trust deeds are also frequently called junior loans or subordinate loans.
Trust Deed Investing in Los Angeles
Do you ever wonder how people manage to stay so comfortable in Los Angeles? One of the most expensive places in the world to live and thrive in.
In one broad word, I’ll explain to you how the “rich get richer”: Investing.
Trust deed investing in Los Angeles is one of the many avenues that hard-working individuals use to prolong their wealth and allocate their money.
When you become a trust deed investor, you become a bank! And any private lender you decide to go with becomes your broker.
More specifically, with PMA, you become a private money source for real estate investors who purchase, repair, and resell real estate; buy to hold rental properties; or borrow private money to add and construct new properties.
Trust deed investing is one of the safest investments and a great way to diversify your portfolio out of Wall Street…
Although, you may ask: Well how come major Wall Street firms don’t offer trust deed investments?
It’s simple really… They don’t make enough profit on those investments to even offer them as a service! They have huge overhead, it’s not worth it for them to even consider going that route for their clients.
That’s why real estate professionals who are getting into trust deed investments in Los Angeles like to specifically work with private-money lenders who have very small overhead and have their success in mind.
When the client succeeds, the private lender succeeds just as much!
So, to answer the most important question of the article: Why should I become a trust deed investor? I’ll give you the only three reasons that matter…
- Passive Income Every Month
- High Yielding APY
These three statements by themselves are enough reason for any 9-5 borrower looking to dip their toe in Real Estate Financing to really take that first step and run with it.
Trust Deed Investing Vs. Mortgage, What’s The Best Option?
On the surface, a deed of trust and a mortgage perform the same task. Both contracts create a property lien to guarantee loan repayment. In both situations, the lien grants the lender the authority to legally sell the property in order to recover losses if the debt is not paid in full.
In essence, the purpose of a deed of trust and a mortgage is to guarantee lender repayment by the borrower.
However, there are only two parties engaged in a mortgage.
A trustee, who owns the title under a trust deed until the debt is returned, is an additional party. The trustee has legal justification to foreclose on the property if the loan is not paid back.
If a borrower is unable to make mortgage payments, the foreclosure procedure—known as a judicial foreclosure—must be started through the courts. A deed of trust eliminates the need for judicial filing.
Be careful though, because trust deeds are not permitted in many states. California is one of the states where you can file for a deed of trust, along with Alabama, Colorado, Georgia, Hawaii, Idaho, Michigan, and more.
The Bottom Line
The main point I'm trying to drive home here is that there are options out there for you investors to really take control of real estate financing in Los Angeles.
This investment option is a low-risk alternative to other investment solutions that may provide crazy rewards.
Here at PMA, we want to widen your "toolkit" when it comes to understanding your investment capabilities.
Gone are the days when you'll work a 9-5 and come home and relax in your Los Angeles home and live comfortably. This article is for borrowers that want to transform their lives and create other avenues of passive income every month!
If you're interested in investing in a trust deed and having a lending partner every step of the way, consider looking into Professional Mortgage Associates! Contact us at [email protected] today to talk to one of our trusted PMA Partners.