Novice investors will most likely ask themselves what is it that makes trust deed investing “attractive.” Why should they be interested in investing in a relationship with trust deeds?
Simply put, if structured properly, trust deed investments offer an attractive current yield with relatively low risk. Trust deed investors usually earn high single-digit annual returns, paid monthly. In some cases, returns above 10% are possible. These returns are very favorable relative to other investment options with similar risk profiles.
The risk of losing money in a trust deed investment is mitigated by a built in “margin of safety.” The margin of safety is the difference between the loan amount, and the value of the underlying property. The core concept of trust deed investing is that if the borrower does not perform, the lender can foreclose on the property and sell it to recoup the investment, plus any past due interest. If the loan is sufficiently conservative, i.e. the property value is high relative to the loan amount, then the investment should not lose money even if the borrower defaults on the loan. A well structured trust deed investment might have a loan-to-value of 60%.
Truly, a trust deed investment can be quite striking indeed.