With any type of investment, there is the possibility for great profit and for great loss. It’s the nature of investing. There are things you can do to minimize your risks while maximizing your potential. If you want to consider trust deed investing, for instance, there are a few things you can do to boost your potential for profit.
Get to Know the Local Market
Itâ€™s not enough to know whatâ€™s going on in real estate nationally if youâ€™re looking to make your first trust deed loan. You need to understand whatâ€™s going on locally. More specifically, you need to do your homework and know how quickly properties are moving within the community where the investment is being made and how much those properties tend to go for (and in what condition). These key details will help you understand which types of loans youâ€™re willing to invest in a specific real estate market too.
Trust Your Broker, But Verify the Deal
Itâ€™s always good to develop a mutually beneficial relationship with a mortgage broker if youâ€™re looking to invest in hard money loans for real estate. But, it is even more important to protect your financial interests. After all, brokers have a stake in making the deal as well. Make sure you do your homework on the property and avoid the temptation to let the broker do all the heavy lifting for you when it comes to researching the deal.
Be Specific in the Details
There are many moving parts involved in trust deed investing that go beyond the basics of offering the money and being repaid. You need to establish the terms of the loan before the deal is done including the repayment period, how often and how much you will be paid and who will hold the title during the repayment period.
Make sure that all terms are spelled out in the agreement and that all parties understand their roles in fulfilling those terms. Never sign if there are details that seem unclear to you. This will help to avoid any confusion after the fact.
Protect Yourself and Your Stake in the Investment
The beauty of hard money lending, like trust deed investments, is that you can earn a substantial return on your investment, however, if the deal goes south you might be left holding nothing if you fail to stay on top of things like property taxes that could provide another entity, such as Uncle Sam, a claim to the property if the borrower defaults.
If the borrower begins to get behind in notes with you, it is likely that he or she may be getting behind with other stakeholders who may have a claim to the property securing the loan as a result. You may need to step in and make these payments in order to protect your interest in the property should the borrower default. You should be prepared for that possibility when offering the loan as a trust deed investor.
Vet Your Borrower
While the real estate is your security when investing in trust deeds, itâ€™s important to understand the creditworthiness of the borrower as well. This will help you lend with confidence that the borrower has a history of responsible borrowing and repayments. However, even the best vetting processes in the world canâ€™t foresee every possible outcome or problem. Always invest with caution.
Can Trust Deed Investment be Profitable?
Absolutely! In fact, many investors prefer this type of investment because it offers a far better, and faster, return on investment than other investment opportunities allow. Before you dive in, though, it’s important to take steps that minimize your risk and reduce your exposure should things go south.