Do trust deeds offer an overlooked investment opportunity?
Not to long ago, I spoke with William Jordan, president of William Jordan Associates. He told me that many investors are overlooking an alternative investment opportunity: Trust deeds.
“Trust deeds are mortgages against pieces of real estate,” Jordan told me. “These can be first, second, or third mortgages. Those we deal with are mostly for business purposes.”
Basically, someone looking to purchase a piece of investment property, or someone who wants to buy real estate for a business, turns to private financing instead of a bank. “Borrowers use them to finance a business or investment property, rather than jumping through hoops at a bank. Investors lend the money to the borrower, and reap the return,” Jordan explained.
Trust deeds provide a way for individuals to fund a loan note, helping to fund specific properties that they think will do well.?”While it's possible to invest in residential trust deeds, I don't encourage it,” he continued. “The potential returns just aren't as high, and when a homeowner defaults, the foreclosure process is onerous.” Jordan pointed out that if there is a default on an investment property, it can be taken over by the investor and serve as a source of revenue.
Reducing Risk When Investing in Trust Deeds
Part of the reason that Jordan is so enthusiastic about trust deeds is that it is possible to reduce the risk involved from foreclosure. “Right now, there are a lot of discounted properties out there, and we only do deals to finance about 50% of the loan. If you do 50% of a $200,000 property, investing $100,000, even if there is a default, you can still sell for more than you paid for it.”
Jordan offered the example of a group of his clients that went in together to invest $1 million on a Section 8 rental property appraised at $2 million. When the borrower defaulted, the three clients took over ownership. Because the property is Section 8 housing, the rent is going to keep coming in. They can take their time selling, and in the meantime see regular income from the property.
Jordan also put together a trust deed fund for investors who might not be able to do huge deals. “You can write a check into the fund, and finance several notes at once. As long as loan-to-value ratios are so low, the risk is limited — and I do a lot of due diligence to choose properties for the fund.”
It is also possible for clients to pay 1% or 2% to insure against losses on the fun. “I'm looking at Lloyd's of London for insurance. The idea is to make sure that clients don't lose a lot.”
Right now, insisted Jordan, trust deeds are a good deal. He acknowledged that they might not be such a good deal as the real estate market recovers, though. And, of course, there is always the risk of loss. “Before the crash, some were investing in trust deeds with a loan-to-value of 90%,” Jordan said. “That just wasn't sustainable. By focusing on 50%, we're hoping to limit a lot of the risks.”
A trust deed, like many other investments, offers potential, and could make an interesting alternative investing idea for the coming year. However, you do have to be aware of the risks. The right trust deed investment right now can yield solid returns. But, at the same time, you could lose money. Trust deed investing should be carefully considered, and you should make sure that you aren't investing anything you can't afford to lose.
Image source: Kenneth Allen via Wikimedia Commons