The investment in trust deeds can provide a lucrative opportunity for many people. There are advantages to this type of investment strategy. It does offer a rather impressive return, and the risk is moderate. Yet, there is risk present. For those who plan to invest in trust deeds, it pays to know a few key aspects of the process as well as what you can do as an investor to reduce your overall risk. There’s much to take into consideration here.
Investors Can Reduce Risk with Due Diligence
Not all real estate trust deed investments will end in a positive way – but you can significantly reduce this risk if you invest wisely after doing due diligence. Investors will need to learn as much as possible about any investment prior to investing. This includes:
- Learning the true market value of any real estate property
- Creating an accurate credit profile for the borrower and weighing this against risk tolerance within the transaction
- Determining what ability the borrower has to make monthly payments (how comfortable is this payment for the borrower?)
Due diligence is perhaps the backbone of any investor’s portfolio. This is especially important with first trust deed investments that you make. A strong, stable initial investment can make a big difference in any borrower’s long-term success with trust deeds.
Managing the Project Long Term
Unlike other investment strategies, investors can continue to play a significant role in the future and success of their investment long term. Staying up to date and managing the investment (as much as you deem necessary) gives you more control. For example, know what’s going on with the borrower. In the worst-case scenario, it is possible the borrower will default.
If you’ve kept up on the actions of the borrower, you know your investment is safe. For example, you can monitor the payments on the property taxes for the real estate property. You can ensure the deeds of trust, property taxes, and any other senior loans are up to date. When these types of liabilities fall behind, it eats into your investment’s collateral. Monitor the credit health of the borrower as much as allowable throughout the process.
Maintain All of Your Investments on an Ongoing Basis
Investors in trust deeds can minimize some of the risks of their investments by diversifying their portfolio. Mitigate some of the risk from a high-risk investment with a lower, more secure investment. By doing this, you can better hedge against risks when one borrower defaults or becomes behind on payments. Of course, the goal is to invest in only trustworthy, responsible borrowers, but like any other type of investment, there will be some risks present. A diversified portfolio can minimize many of these risks in the long term, ensuring you’ll have a profitable return overall.
Ensure You Are Confident in Your Investments
It’s important to realize that when you invest in a real estate trust deed, your financial investment is set for some time. As a result of this, you may be without those funds for some time. Be confident in this. If you are concerned about having access to your funds, it may not be the ideal type of investment to make.
Trust deeds can be very favorable for most investors. The key here is to focus on creating a portfolio that you are comfortable with in terms of risk management and overall profitability. Being confident in each investment is important, but realizing there is at least some risk present in all situations is essential for any type of investor.