When people think of real estate investing, they envision an HGTV show with a glamorous host who parades in front of a camera, finding and flipping properties for profit. But did you know there are several different ways you can invest in real estate besides flipping properties? What is a first trust deed? Trust Deeds, also known as Notes, allows investors to take a stake in a piece of property without getting their hands dirty. Basically, an investor can purchase the trust deed of the property and hold it in lieu of repayment of a loan. This alternative method of generating investment dollars allows house flippers to use the hard asset of the property as collateral to acquire a loan to finish the renovation. The trust deed holder then acts as the private money lender to the flipper, while protecting their investment by taking a lien position on the investment property.
The Challenge: Finding Funding
One of the most challenging aspects of real estate investing for the fix-and-flip investor is funding. Many flippers might be short on cash or highly leveraged with monies sitting in other hard assets, including other properties. First Trust Deeds benefit both the home flipper by providing capital to purchase and improve the property, while simultaneously providing ROI to the lender in the form of interest payments on the loan.
Differences Between a Mortgage and First Trust Deed
People tend to think of property loans in simple terms of mortgages. And rightly so, as most people familiar with buying a home use mortgages to acquire the loan to make the purchase.
But there are some distinct differences when you look closely at what constitutes a property loan in each state.
Mortgages consist of two parts: the promissory note and the trust deed. The promissory note consists of a promise to pay with the loan details and repayment terms. This agreement between the lender and borrower creates a lien position on the property held by the lender. The lien, depending on the state, can be created either by the mortgage or through a trust deed. These give the lender the power to foreclose on the borrower in the case of nonpayment. A lien is a legal claim on a property. In the first position, the note holder has “first dibs” on the property if something goes wrong. Lienholders can also take a second position on a property, but this comes with more risk.
Under a mortgage there are two parties, the lender and the borrower. But in states where trust deeds are used to secure a loan, there are three parties involved. These consist of the following:
- The Lender;
- The Borrower; and
- The Trustee (who holds the trust deed).
The function of the trustee is to sell the property at auction in the case of foreclosure. Under a traditional mortgage, foreclosures for lending institutions like a bank can be complex due to state laws. In cases such as these, a “trustee” facilitates the sale of the property at auction in the case of a foreclosure.
One of the great things about investing in trust deeds is that it gives the investors a return on their money with managed risk. That “managed risk” is that by owning the First Trust Deed lien position, the investor receives some protections as the hard asset (the property) acts as collateral. The foreclosure process can be complex and take time, but for the note holder, there is at least some protection for their investment dollars if something goes wrong. Typically, many private loans are short-term. Anywhere from 1-3 years. This allows the investor to earn passive income in the form of interest payments over the loan period.
Benefits of First Deed of trust in real estate
- Higher rates of return for the investor
- Reduced risk
- Loan is secured by the property
- Shorter loan terms
Risks of FIRST DEED OF TRUST IN REAL ESTATE
- Not federally insured by the FDIC
- Title problems can interfere with returns
- Investor is responsible for the accuracy of the appraisal
- There can be some difficulty if the owner declares bankruptcy
First trust deeds for sale
Interested in investing in trust deeds? Now you can with an experienced investment team that can walk you through the steps of acquiring notes on properties throughout the U.S. Click the button below to peruse available opportunities and don’t hesitate to call our funding team with any questions. You can reach them at (800) 427-9898.
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