What is trust deed investing?
Trust deed investing is simply investing in loans that are secured by real estate. Most trust deed investments are relatively short-term loans given to professional real estate investors. Banks can be reluctant to lend to investors who seek these loans not because the loans are particularly risky, but because some banks have a great deal of bad real estate loans on their balance sheets. This is obviously a result of the loose lending practices that lead to the housing market crash in 2008.
The value in their scarcity
In today’s day and age, banks are unwilling to make real estate loans unless they fit a very strict set of criteria. Which may seem harsh to people who are denied, but means that ill-suited individuals aren’t taken advantage of. They often don’t lend to opportunistic real estate investors because the property which is “security” for the loan usually needs some work, i.e. is a fixer-upper. For this reason, real estate investors have limited financing options available to them, and lenders to this market are able to charge higher than average interest rates.
Why is trust deed investing favorable?
If outlined properly, trust deed investments offer a high-return with moderately low risk. In some cases, returns above 10% are possible. Needless to say, the high returns that can be made from trust deed investing are preferred over other investment options with similar risk profiles. The risk of losing money in these investments is reduced by a built-in safety button.
Paired with an IRA
One of the biggest reasons investors use their IRAs to invest in trust deed is because income from trust deed investments are treated as regular income. This means that that income is taxed at a higher rate than other types of income. This is where an IRA comes in. Through investing in trust deeds from an IRA, that disadvantage is neutralized since all income earned on an asset invested with an IRA goes directly back into your IRA.