Add Trust Deed Investments to your Investment Portfolio
Trust Deed Investing: Should It Be In Your Portfolio?
When you sit down with your stock broker to review your current financial picture with an eye on retirement, it’s typically about asset allocation. A mix of stocks and bonds spreads out risk and as an individual gets closer to retirement the goal is more toward asset protection and less so on greater returns. The younger the individual the more risk that can be taken as time can make up for losses on individual stocks or mutual funds. Closer to retirement more funds are shifted to bonds providing a level of security stocks cannot offer but at the same time provide lower income. But rarely will you see a financial adviser or stock broker suggest Trust Deed investing. Either the adviser is unaware of trust deed investing or the adviser is aware of trust deed investing but there is no commission involved. But as an investor, you should consider adding trust deeds to your portfolio.
What is trust deed investing? Very simply, trust deed investing in loans that are secured by real estate. A private lender approves loan applications to borrowers who acquire investment real estate. Private loans are for a relatively short period of time, typically only long enough to make necessary repairs or while the borrowers are getting permanent financing ready. Private lenders have a pool of individuals who provide funds needed for a hard money loan. As a private loan is issued, a trust deed is recorded with the individual’s name listed on title. In this fashion, the loan is then secured. When the property is sold or the private loan is replaced by permanent financing, the individual is repaid with interest and the lien is released.
The advantage of trust deed investing is both higher returns and security. While individual stocks can provide significant returns to the lucky investor over time, a stock can also go to zero over time. Let’s say an investor identifies a potential home-run stock and buyers 1,000 shares at $20 per share, or $20,000. Over the next few months the publicly traded company does very well out of the gate and the stock settles in at $30 per share. So far, so good. But the next quarterly earnings report is a major disappointment and the stock takes a hit. The company continues to perform poorly to the point where the company files for bankruptcy. The investor loses everything invested in the company.
Real estate will never go to zero. It’s a physical asset the investor can actually see. Further, when a real estate investor applies for a private loan, there is a minimum down payment of at least 30 percent from the borrower, meaning the loan cannot be greater than 70 percent of the final appraised value of the property. This initial equity provides additional security in the investment. Trust deed investing provides greater returns while providing a level of security that a stock or mutual fund simply cannot match.