How to Safely Invest in Real Estate Trust Deeds
Real Estate Trust deeds are simply loans made out to borrowers against a real estate property. In this case, borrowers are individuals who can’t access alternative capital mainly because banks are not lending to speculative real estate investors. As an investment, speculative real estate can offer high returns in a relatively short time. Ideally, a real estate investor borrows funds which he or she uses to buy and fix up real estate from the trust deed investor. The real estate professional then sells the property for a profit and pays back the loan and interest. In the period of the loan, the property is the security. Unfortunately, the real estate market is quite unpredictable and sometimes the investment doesn’t sell. Consequently, the trust deed investor faces the possibility of losing money. Below, we look at tips on how to avoid losing funds in trust deed investing.
Get Maximum Title Insurance as a Lender
A title insurance policy might sound like an unnecessary expense for a lender but a title policy can protect the lender’s interest especially if he needs to sell the loan in the secondary market. Getting title insurance is also an ingenious way of having someone else verify the integrity of a property’s documents for you. This is because the insurance company will conduct an extensive research on the property before selling you a policy. If they find any problems, they will not sell you the policy. You will in turn avoid a bad deal.
Inspect the Property and Its Documents Personally
Before lending any money, go out and physically inspect the property against which the loan is being taken out. This way you will be in a good position to assess the risk involved. It helps to have professionals in real estate and construction businesses accompany you to the inspection because they will help evaluating the property’s worth.
After the physical inspection proceed to take a look at the documents. Properties that are owned by families and partnerships present higher risk that those owned by individuals. If you are uncertain about any document, do not hesitate to call a lawyer for advice.
Diversification helps spread risk and reduces your exposure. In trust deed investments, you can diversify by buying in on a deal structured in a way that you don’t provide the whole amount for the loan. This means that each party will risk only a small amount. The returns on each single deal might be low but when you compound that with many small deals you end up with a relatively low risk investment portfolio.
These tips should set you on your way to safe trust deed investing. When you know what you are doing, this is one of those investment vehicles that a relatively small investor can take advantage of since the “big boys” of Wall Street are not particularly interested in this type of investment, since it is not scalable. That being said, it’s always best to choose an investment vehicle that you feel you understand well.
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