Self-directed IRA Trust Deed Investing

What are Trust Deed investments?

Trust Deed investing refers to a private individual making a loan to another individual with real estate as collateral. The real estate may be a house, vacant land, apartment building, commercial property, or any other piece of real estate.

Where does the "Trust" and "Deed" come in?

A trust deed is a deed to the property which is given to a third party who has received instructions on what to do in the event of the payoff of the property or a default. In today’s market, the trustor is usually a corporate trustee which literally holds the deed in a trust. Upon payoff of the promissory note, the trustee is instructed to record a document called a "Reconveyance" which literally "reconveys" the deed back to the borrower. In the event of a default and after the proper legal steps have been taken, the trustee conveys the title to the property to the lender.

What are the benefits of Trust Deed investing?

  1. Secured By Tangible Property - Trust Deed investments are secured by a tangible property you can look at, and decide whether or not you would like to own the property if you foreclose on the loan.
  2. Safety - Trust Deed investments are low risk. As long as there is value in the property, your investment is secure. Most people don’t loan more that 65% of the value of the property, so you are assured that if foreclose is necessary, the property can be able to be sold to recoup the investment and make a profit.
  3. Great Returns - Depending on the type of deal, the borrower, and the property, it’s typical to expect returns of 9-18%. However, past performance is no guarantee of future performance, and your returns may vary.
  4. Familiarity - Many people are familiar with real estate investing because real estate ownership is very common. Stock transactions (which produce the kinds of returns one can find in trust deeds) often involve derivatives and complex financial instruments most people don't understand, and don’t want to spend time researching.

What are the risks of Trust Deed Investing?

  1. Know The Value of the Property? - In a market where property values are decreasing, it can be difficult to be sure of the value of a property. It’s best to stick to areas in which you know the prices of property, or are able to insist on a good appraisal. Because private money loans are often made quickly, (and fast turnaround is often the reason borrowers are willing to pay a premium for the loan) getting a full appraisal in a matter of days can be problematic.
  2. Know Your Position - Title insurance is a must, since the title company guarantees your position in the transaction.
  3. Make Sure You Have Extra Cash Available - You should only invest a portion of your available assets in Trust Deeds, and you should be sure that the balance of your available assets are fairly liquid. If you are in second position, in the event of default on the first, you will have to bring the first current in order to foreclose. Avoid putting a small loan behind a large one. If you have a $50,000 loan behind a $1,000,000 first, you may have to put up more than your entire loan amount just to cure a default.
  4. Quick Decisions - Though not really an additional risk to Trust Deed investing, one thing that can compound the risk is that often Trust Deed investing requires a quick decision, sometimes with all the facts not yet available. Often a preliminary decision is necessary within 24 hours. (See below under "Staged Contract")

How would I get started doing this?

  1. Earmark some funds to get started.
  2. If you are investing IRA or 401(k) funds, set up the accounts with our custodian American Estate & Trust. We will assist you in doing this.
  3. Once you tell us how much you are willing to commit to an investment, we will discuss your risk tolerance, whether or not you want to be in first or second position, what areas you are familiar with, and what kind of properties you would like to loan on. We will then contact you with possible investments.
  4. Staged Contract - The final decision to loan on a particular property is usually a multi-step process. This occurs over a period of several days, but must be made in a timely manner.

Why IRAs and 401(k)s are so well suited for Trust Deeds

Many people want to invest their IRAs in real estate, expecting an above average return on investment. However, selecting real estate that will generate that return can be challenging. Picking investment properties requires a lot of homework and usually additional cash investments to fix up the property. Then you have to find suitable tenants and become an active manager of the property.

With Trust Deeds, you will need to know how to identify and profile properties and the tenant, but the effort and risk is somewhat reduced. Additionally, your IRA is usually looking for long term, good return investments. Trust Deeds will tie up cash for 1-2 years, but most people are not usually trying to draw money from their IRA, therefore cash flow is not a critical issue from a personal living expense perspective.

Note: people who are entering or near entering their required minimum distribution phase for their IRAs should be careful with Trust Deeds and how much they tie up at any one time.

Your IRA is designed to hold investments on a long term basis and Trust Deeds appeal to the investment profile for most people and their IRA. Additionally, the rates are return are attractive enough to make it a worthwhile option for your IRA.

Most IRA custodians will not allow you to invest in Trust Deeds. There are only a select few who will allow this, but most of them will not provide any support or consulting resources to help you have a smooth, quick and successful transaction. Accuplan Benefits Services' sister company, American Estate & Trust does allow investments in Trust Deeds and uses Accuplan Benefits Services as the consulting resource for purchasing Trust Deeds.

What are the investment requirements?

You can get started with Trust Deed investing for as little as $10,000

To learn more about Trust Deeds, other investments for IRAs or about self directed IRAs check out our Self-Directed IRA Blog.