For new real estate investors, purchasing properties outright to fix and flip or use for rental income may seem like the only or most promising way to make money in the real estate investment arena. While real property purchases do account for a great deal of investments, there are other options for those who want to make money on real estate without purchasing properties outright. Among the most well-established practices is trust deed investing, which is widely used in California. In fact, many investors who want to start trust deed investing use hard money loans to fund their purchases.
Understanding Trust Deed Investing
As its name suggests, trust deed investing isn’t about purchasing real estate investment properties but about purchasing some or all of a property’s deed. Real estate investors who are interested in using hard money loans for these types of purchases generally work with a mortgage banker or lender to find a trust deed that they would like to invest in. These trust deeds are held by financial institutions (lenders) who provide financing for individuals who want to purchase properties (borrowers).
Profiting From Trust Deed Investing
When a real estate investor purchases some or all of a trust deed, they are setting up a relationship as an intermediary between the original lender and the borrower. If you decide to start trust deed investing, you stand to make money in one of two ways:
- The borrower pays back the loan in full.
- The borrower defaults on the loan and you foreclose on the property in order to recover your investment.
The Importance of Property Values In Trust Deed Investing
It’s essential to remember that property value matters a great deal when it comes to trust deed investing. While you don’t need to invest in a property you would want to live in, you do need to invest in a desirable investment property that can be sold at a profit should the borrower default.
Using Hard Money Loans for Trust Deed Investments
Because trust deed investing doesn’t require the outright purchase of an investment property, some investors buy only a portion of the deed. This can be a great option when using trust deed investing in more expensive markets like California. The flexibility of trust deed investing has made it popular and viable for clients who use hard money loans for their real estate investments. While this type of financing is generally offered at a high interest rate, savvy real estate investors who choose properties wisely can still see a significant return on investment (ROI). Remember that working with a reliable, private lender is essential when pursuing a hard money loan for any real estate investment purchase.