Today we have Heather Dreves. She’s the Director of Funding at Secured Investment Corp and fund manager for one of the fastest growing U.S. companies in the private money marketplace in the US, focusing on residential real estate investments.
Investing Through a Trust Deed
- Trust deed: What it is, how it works, and its pros and cons
- 2 types of trust deed funds
- Tips for consumers seeking a fund manager to invest their capital in
- Advantages of investing in verified and monitored funds
- How to invest in individual trust deeds and the risks involved
- Why self-directed IRA is a popular tax-deferred strategy
Source: Bonavest Capital
Hosts – Seyla & Aileen Prak
You mentioned funds and trust deeds. For those who aren’t as familiar with it, can you break it down for us at the top level? What is it? How is it structured?
Guest – Heather Dreves
Trust Deeds/Notes
I think historically private money really got started with something as simple as a borrower needing to borrow funds to buy an investment property and an investor that had capital that was looking to deploy it in a fashion that was backed by a piece of real estate.
And so historically when people think of private money and the passive side of it, a lot of people refer to trust deed investing and that is where you are an investor, you are buying a trust deed, which is essentially a lien against the property. You’re the bank. Now that is what is securing your money and that is the asset, is the actual lien against the property. The investor makes money off interest payments. Our borrowers are required to make interest payments every month. That’s how our investors make money and are paid.
And then their principle is returned when that loan is paid off. And keep in mind in the private money industry, there’s lots of different ways to structure loans and structure how an investor gets paid.
But the way that we structure our trust deeds is that borrowers make monthly payments, and investors that buy those trust deeds, get those monthly payments, they’re passed on through to them. And then the principle is returned to them when the borrower pays the loan off.
But essentially the security is that lien against that property. So that means that yes, a borrower may not make their payment and that is not the norm, but there’s risk in everything that you do, no matter what investment someone’s looking at. It’s important to understand what your recourse is if borrower doesn’t make their payment.
The lien holder has the legal right to foreclose and take that property back. That’s what secures your money. So trust deeds are very active investors, they look at the deals, they do their due diligence. We’re very transparent. We share all that information with them. And then when they decide to move forward, we draw paperwork, we assign our interest in that trustee to them. So there’s a lot of opportunity.
But what we found was a lot of people weren’t understanding the risk at first. They liked the idea of the borrower making a payment, but when you started talking about, hey, if they don’t make their payments, these are your options. It kind of freaked people out.
Funds
And so we decided as an organization that funds would be a nice option because this is how we originate all those trust deeds and people can invest money in the fund instead of directly in the trust deed.
So that way, their money is diversified over hundreds of trust deeds instead of just buying one, we manage it. They don’t have to deal with me calling them saying, hey Eileen, your borrower didn’t pay. We think you should foreclose and you’re going to have to front some foreclosure costs. It’s the same asset. It’s the same trust deeds with first liens against these properties, but it’s very hands off. The fund is just a way for you to passively invest, deploy some capital, but still get the same types of yields.
I mean whether you’re buying a trust deed or investing in the fund, your yields are probably 8%–11% depending upon what trustees or what fund that you invest in. But what I tell people is you really kind of just have to decide, you know, do a have a checklist, how active do you want to be?
And I tell people with trust deeds make sure that you like that property, because that’s your security. You’re going to take it back if they don’t pay. And so, you know, I think if people can do a due diligence checklist and say, am I active or am I passive? Do I want cash flow, or do I want growth?
So our funds have the ability to just reinvest your earnings. And a lot of people really like that, then I think running through that checklist then they come back into what fits for them. And like I said, for some people, the trust deeds are very attractive, and they like that because the trust deeds have a lot of equity in those loans. So that’s the key when you’re buying trust deeds. What’s that equity position? That’s what secures you if you take it back. So, our trust deeds are written with at least 30% equity.
We don’t do 100% of the value. So that’s another attractive thing for trusted investors.
Hosts – Seyla & Aileen Prak
Okay, so this one here for the funds you said it’s more of a passive investment. There are hundreds of different trust deeds within one fund. As an investor, we would look at the fund and then invest in there and so you would get a monthly payment after your initial investment.
Guest – Heather Dreves
Yeah, so we have two funds. One is for accredited investors. So, someone with a higher net worth would qualify to go in our accredited investor fund that has a $50,000 minimum investment and that pays out quarterly earnings. The exciting thing is we opened what’s called a regulation A+ fund, which is not very common out there, especially with real estate as an asset.
And really what that means to the general public is anybody can invest in it. You don’t have to be an accredited investor. That fund has a $1,000 minimum investment. The exciting thing about that is that it pays monthly earnings. For investors that are looking for monthly cash flow, that fund is a really nice option.
Hosts – Seyla & Aileen Prak
So quarterly versus monthly, $50,000 minimum versus the $1,000 minimum. In terms of liquidity, once you invest in the fund, how long is your capital tied up in that fund? And are you able to pull it out?
Guest – Heather Dreves
Our tie up period on either fund is 12 months.
Investors must stay in for a year and then after that first 12 months they can choose to divest out or they just stay in, which most of them do.
Hosts – Seyla & Aileen Prak
And at the exit, what is the percentage return based off?
Guest – Heather Dreves
It’s based off their equity membership holdings in that fund. The funds are set up as LLC and investors are members of the fund. When we calculate profits, if for some reason someone had 50% equity, they would receive 50% of those profits. And then as they exit the funds, if they have any remaining funds, they still yield the earnings of the fund as they’re exiting the fund.
Hosts – Seyla & Aileen Prak
The fund is truly a passive investment where the investor doesn’t necessarily have to manage anything. Your company does everything. It handles the management of the exit of and everything like that.
Really, they’re just depending on which fund that they decided to invest in, it’s either the monthly or the quarterly earnings that you would get and then after the year the capital would be returned or you can reinvest.
Guest – Heather Dreves
Yes. If they choose to exit or we call it divesting then, after that 12-month period, then they can divest out of the fund.
Hosts – Seyla & Aileen Prak
Both funds are very friendly to self-directed IRAs or 401Ks too, and then if it’s an investor’s first time looking at a fund, what are some of the top things that they should be looking for when, you know, doing their due diligence and evaluating whether it’s a good opportunity.
Guest – Heather Dreves
You know, I love this question. This is exciting too because in the fund industry, and you probably can attest in this, there are a lot of operators out there and are people that are not running funds the way that they should.
And it’s unfortunate because I think it gives a bad name to this industry sometimes.
Third Party Fund Auditing
Our funds are fully audited. We pay an outside auditing firm to come in and audit our funds. That’s something important for an investor to look for. When you’re looking at funds, we’re very transparent with our funds and our fund reporting is above and beyond what is required. We believe in transparency and most recently we joined a platform called Verivest, the best platform that fund operators much like ourselves can go to and we can engage with them, which we have and they will do quarterly compliance on fund operators and as a consumer or somebody looking to invest capital somewhere, make sure you’re doing your due diligence.
Verivest comes in every quarter. We are very transparent with our financials because audited funds are great, but it only happens once a year. So, what happens for those 12 months? I mean, if you’re not a good fund operator, there’s a lot of shady things that can go down. So having a third party looking over our shoulder, doing compliance on a quarterly basis is a huge benefit.
Due Diligence
I would always say:
- Do your due diligence
- Don’t be afraid to ask questions
- Ask for audited financials
- Asked for fund reports and historic fund return data
Our funds have historically paid out 10%–11% for the last eight years. So that’s exciting and we have that information for investors. If people can’t provide that and they’ve been in business for 10 years, there’s something wrong. So just be very diligent about your due diligence is I guess what I would say. And are there one of the things that you mentioned was, you know, check the historic MLS and verify that as well.
Host – Seyla & Aileen Prak
Is there anything else in terms of like red flags as people come across different opportunities that they should be aware of?
Guest – Heather Dreves
Yeah, I mean on the fund management side of things, if people don’t have audited financials, I would run the other way, you know, because an audited financial is a third party coming in and they basically take fund operators private placement memorandum and then they don’t just look at dollars coming in and out.
Build a Relationship with Customers Based on Clear and Transparent Information
They look at the activity of the fund and they say, hey, your private placement memorandum says you you don’t go above 70% Loan to Value (LTV), this loan is at 80% LTV and so here is an outside party that has their eyes on a fund. If a fund management operator does not have that audit in place, I would be very skeptical.
You want that secure relationship with a client from the beginning. Customers will really like a fund, they want to invest. But honestly, like I tell my team, they’re investing in us more than anything. This is a relationship. Some of my clients I’ve worked with for 18 years. This is not a transactional business, a one and done. This is something that, you know, we would hope that our clients stay with us for years and we help them create wealth and 99% of them do.
Invest with People You Trust
Make sure that you’re investing with someone you trust and you have a relationship with them. This isn’t just a onetime transaction. I would be very leery of something like that.
Host – Seyla & Aileen Prak
What Management is Involved for the Trust Deed Investor
So, now I’d like to ask a couple questions about trust deeds. The trust deeds you mentioned that it’s more for the active investor who’s looking to have a little bit more control over their investments. So your company provides different properties that you can choose from. People are the investors, looking at doing their due diligence and evaluating different investment properties. And then from there, once they make a decision, what kind of activities are involved in managing a trust deed?
Guest – Heather Dreves
I tell people the most work they have to do is picking the trust deed they want to fund.
I highly encourage people to always do their own due diligence. What we do is these trust deeds are loans we’ve already sold, already closed, and originated. When our clients work with us, for example, they say, I like that deal out of Texas. Great john, I’m going to send you the due diligence package. We provide our clients with all the information. And whether if you’re buying trust deeds from us, you know, you’re going to get that. But I really caution people.
Due Diligence on the Borrower
Do your due diligence on the borrower. We provide credit reports, tax returns, bank statements. We do a background check really looking for more white-collar issues, crime, fraud, things like that. If there’s going to be rehab involved, we will provide a contractor’s bid so that our investors know exactly what’s being done to that property. And then we manage those draws and then we even go above and beyond where we service the note. We don’t want our investors that buy trust deeds to ever have to call somebody and try to collect on payments.
Collecting Payments
We do all the collection of these monthly payments. We disperse those to our investors that buy our trust deeds. And then when they buy the trust deed, we file a lien against the property in their name.
Make sure you have title insurance and make sure there’s a lien against the property. You have no recourse if you don’t have that.
The Risk of Trust Deeds—Foreclosure
But the risk and trust deeds is someone may not pay. And so there is the, I call it “opportunity” to foreclose.
But some people don’t look at it that way, you know. But because these are secured loans with a lot of equity in them, there’s a lot of upsides to foreclosure. But the reason I bring that up is because will help them. We will take it all through foreclosure. We’ll find an attorney for them.
We’re not here to just sell a trust deed and wish them luck on their way. We want to see that deal through the end until they get all their money back. And that happens more often than not.
Host – Seyla & Aileen Prak
And then what are some of the, I guess the common mistakes that you’ve seen people have gotten into as like part of their first ones or couple down the road.
Guest – Heather Dreves
Emphasis on Vetting the Borrower
Our goal is an origination company is to not only provide are investors passive opportunities, but our goal also is to make our borrowers successful.
We do really weigh heavily on the borrower, probably more so than most private lenders because we want to put them in a good position where they can be successful. We want them to get the property done, sell the property, make some money, pay us off, and come back. I want to see that they have cash. I want to know, do they have experience, if they don’t have experience, what are their resources if they have a hiccup?
What is Important to the Investor?
So those are things that, as an investor buying trust deeds, you need to decide what are important things to you. And once you have that List of probably 8-10 things, then when you’re looking at trust deeds, it’s not so overwhelmed.
Selling Whole Notes
And then dollar amounts. We sell whole notes. If it’s a $50,000 note, our investors have to buy it for $50,000. So that might also determine what kind of inventory you’re going to look at it as far as trust deeds go, depending upon how much money or capital you have.
And then what rate of return are you targeting? I will tell you; our trust deeds are priced according to risk meaning your higher yielding trust deeds are going to be people with maybe not as much experience, people that might have a blemish on their credit. Our very qualified people get better pricing.
Understand Your Criteria for Evaluating a Trust Deed
It’s like, that’s not the way this works. So, I guess when someone’s going to look at trust deeds, figure out what your criteria is because if you start just looking at a bunch of them [trust deeds], it’s just too overwhelming. So that way you can kind of weed it out.
We have all our trust deeds listed on our website and we give a lot of content and investors can get a very good idea what the deals are about. And then if they do have interest, then we just send them all the due diligence packages. And they kind of just check it off.
Host – Seyla & Aileen Prak
So then as an investor, would you invest in your own personal name or through an L.L.C?
Guest – Heather Dreves
Investing Inside and IRA or 401K
What’s that typical investment looks like? It kind of depends. I have a lot of clients that use a self-directed IRA and 401Ks because that is a very popular tax deferred strategy. If you were investing in the fund or buying a trust deed, your equity ownership would be held in the IRA’s name. That’s an option. I have some people that have a family trust for estate planning, and they’ve invested that way and I have a huge handful that just invest in their name. What I tell people is I’m not an accountant, I don’t know your tax situation. I would suggest getting with your accountant because I mean these earnings are reported, so do it in the best way that’s going to be a tax benefit to you and not create more tax implications.
And then, based on that question you can decide how you want to invest. But it doesn’t make a difference to us.
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