Normally, loans secured by Real Estate are made by banks,
credit unions, insurance companies and other institutional lenders. However, private parties can, and do, make
these loans, too. And, your Retirement,
Health Savings and/or Educational Savings accounts are all eligible to make
these types of loans. Your accounts can
consistently earn high yields by investing in Trust Deeds.
1. Trust
Deed investments provide higher yields than a money market or Certificate of
Deposit. Often, yields are 6%, 8%, 10%,
or more (depending upon the circumstances).
2. Trust
Deed investments can provide predictable and consistent INCOME (monthly,
quarterly, semi-annual, or annual income).
3. Real
Estate is pledged as collateral, which provides an asset with intrinsic value
to back your investment.
4. If
the borrower does not pay as agreed, the Trust Deed investor can foreclose on
the property, often owning the property for much less than its value.
5. Investments
are normally short term (1 to 5 years).
Your investment is not “tied up” for long periods of time.
Frequently Asked Questions (FAQ):
1. Why would a borrower pay an investor such a
high rate of return?
There are a variety of
situations that create this type of investment opportunity. Here are just a few:
A. The owner has an existing property with equity
and a legitimate need for capital, but the project and/or the borrower does not
qualify for traditional lending (In today’s lending environment, many good
borrowers simply do not qualify for the strict bank lending requirements).
B. A
developer has an opportunity to purchase the property at a significant discount,
then reposition it and sell at a short term profit. To receive such a discount, the transaction
must be closed quickly (often in a matter of days or weeks rather than months). Because the Developer is making a significant
profit through buying at below current market value, the Developer may be
willing to “share the profits” with an Investor by paying the Investor a high
return.
C. A bank wants to remove a loan from its books because the loan does not fit the bank's lending criteria. The bank is willing to sell at a substantial discount if the loan can be sold quickly. Purchasing the loan provides an opportunity for profit to a savvy real estate operator/developer. Using private lending, the operator/developer can acquire the loan, restructure it, and sell at a profit.
2. What happens if the loan is not repaid?
This is a valid concern. The transactions should be structured so that the
Investor is protected through immediate and substantial equity in the
property. If the owner does not repay
the loan, the owner loses all equity and/or profits to the Trust Deed Investor. Therefore, the owner has strong motivation to
re-pay the loan. If the Owner does not
repay the loan, then the Trust Deed Investor can foreclose and often sell the property at
a price that is higher than the loan, thereby making an additional profit.
3. Why don’t the Owners or Developers go to
the bank to borrow the money?
Just a few years ago, the banks
were a viable business partner for real estate investors and developers. Interest rates are low, and bank financing is
the most preferred source. Today, Banks
are not only severely restricted, they also have burdensome requirements and
move slowly. To transact business today,
Owners and Developers need alternate sources of capital. And, they can often get significant discounts
for being in a position to act quickly.
This creates the opportunity for Investors who want to earn a high
return while protecting their investment.
4. What are the tax ramifications of this type
of transaction? Normally, the
interest is characterized and taxed as ordinary income. Please consult your tax adviser to confirm
your particular situation.
5. Can I use my Retirement, Health Savings
Account, or Educational Savings Account?
ABSOLUTELY!!! In fact, we
ENCOURAGE it!! Trust Deed Investments are
excellent vehicles for your Retirement account, HSA (Health Savings Account), and ESA (Educational Savings Account). The earnings grow tax free. If you compound tax free earnings at high
yields, your money grows much faster (earning a consistent 10% annual yield will
double your money in 7 years, and triple your investment in 11 ½ years!!!).
For more information on the benefits of Trust Deed investments, please feel free to contact me directly.
