The Clandestine World Of Trust Deed Investments
By Joel Barth
Many investors dismayed by the stock market and burned by falling home prices may not be aware that there is a
world where investors are still making returns of 12% to 18% or better by making private hard money mortgage loans
and that recent economic conditions have actually increased the demand and need for these types of investments. In
many instances, these investments are also eligible to be held on a tax-deferred or tax-free basis inside of your
self-directed individual retirement account (IRA) or retirement plan.
While you may have heard about trust deed investing, private mortgage investing is not only the buying and selling
of mortgages at a discount. It includes the activity of directly lending your private money to individuals and
businesses and securing that loan with a deed of trust or mortgage against real property. If you are disappointed
with the stock market and are looking for a secured investment with cash flow than trust deed investments may be
for you. You may ask, “What about the declining values of home prices”? Most properly structured private loan
investments are typically only made at a loan-to-value of 40% to 65% providing a significant equity cushion.
Investments can also be secured against commercial properties and are not limited to residential real estate.
Private mortgage lending involves an individual investor or property owner taking on the risks and rewards
typically held by mortgage lending institutions. This type of lending can offer good returns and low risk if
properly structured because unlike a stock investment the mortgage loan is secured against the subject
property.
Private mortgages have numerous benefits to borrowers and investors. They allow borrowers who may not qualify at
traditional lending institutions to get mortgages elsewhere. Investors holding private mortgages can receive
interest rates significantly higher than standard rates offered by banks because they offer greater speed and
flexibility than traditional lending institutions.
A private lender should think the same as a mortgage company, and should demand everything that a good mortgage
company would require when deciding whether or not to make a loan investment. They should also get an interest
rate, which justifies the risk. While the investor must be aware of usury laws, it should generally be at least 50%
higher than traditional bank rates.
In general private mortgages are structured like hard money loans with short-terms and based on the property’s
equity value rather than traditional underwriting criteria such as credit and debt-to-income rations. While these
factors may be considered, the equity in the property is usually the determinant factor. In general, our private
mortgages hover around 45 and 65 percent loan-to-value (LTV), at Northwest Capital Advisors, Ltd., a real estate
investment fund in Seattle, Washington.
The lender should be sure the LTV is not less than 65/35 so there is an equity cushion if the mortgagor defaults,
and lenders should perform due diligence on the borrower and property.
Private Lenders should not jump into private mortgage investing without doing any research. Investing in mortgage
notes takes significant real estate and financial knowledge and investors need to align and consult with a network
of professionals and advisors. Investors must also be aware of the regulatory requirements surrounding mortgage
note investments.
Investors in private mortgage lending used to consist of sellers or friends helping each other with financing.
However, as the profit potential in private mortgages for the lender and the benefits to the borrower have become
more clear it has helped this investment strategy gain notoriety in the investing community and many funds are now
being structured to capitalize on the greatest buyer’s market in real estate history. There is a plethora of
opportunities in the marketplace to capitalize on.
The private mortgage lending business also known as trust deed investing has become quite profitable for private
investors over the past several years, and more investors are entering this field once they learn about it.
Mortgage brokers are also doing more in this arena now as traditional lending institutions affected by the credit
crunch have turned off the flow of funds. Successful mortgage and real estate brokers are bringing individual
investors and borrowers together more than ever to close deals!
About the Author: Mr. Barth is a licensed real estate broker and notary public in Washington State. Mr. Barth holds
a Bachelor of Science in Business Administration and has held the NASD Series 24, Series 66, and Series 7
securities licenses. Learn About Investing
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