When you are investing in commercial real estate risk and reward are words to live by. You have to be able to roll with whatever the market throws at you. Trust deed investing is no different, there will be ups and downs that you have to face. This brief will shed light on some things you may encounter.
Real estate can be a tumultuous and tiresome profession if you let it. The market consistently goes through a feast and famine period. There could be a time when you have revenue coming in from multiple ventures. There could also be times when you have to claw and gnash for a small investment. It is enough to make you not want to be in the industry.
Trust deed investing is not without its faults, however, there are still some cons that you will have to face. One thing that you need to keep in mind is the margin of safety. Basically, the margin of safety is the difference between the loan amount and the actual value of the property that you are investing in. For example, the value of a home that you are looking at has a low value and your loan is relatively high you may run into issues you were to default.
Many investors face complications when they misjudge the market and the margin of safety associated with it. The property that you had high hopes for is in foreclosure because no one could be convinced that this was a good investment. Now you, as the owner of the deed of trust, have to take on sole responsibility for repayment of the loan until the lender can sell it. Trust deed investing can sneak up on you if you are not careful.
One of the biggest drawbacks that trust deed investing poses is it not being FDIC insured. For example, if you were to go to your local bank and get a loan for a home that you are interested most likely you would be able to have the loan insured by the FDIC. In regard to trust deeds, however, the safety of your investment relies solely on the value of the property that you are trying to turn a profit.
You have a lot more work that needs to be done before taking on trust deed investing.
We have said before that for you to be successful in the commercial real estate business paying attention to the details is paramount. Trust deed investing comes with confusing documentation just like the rest. The deed of trust, along with all documents should be double and triple checked to make sure that there are no errors. In some cases, the borrower you are lending to could have ample right to sue you for having invalid documentation. This will end up costing more money in the end.
In rare cases, if you are not diligent in you bookkeeping you could be stuck footing the bill of the investment. Depending on the market and value of the investment it could be months that you would wait to see your money again.
There is no guarantee with trust deed investing.
With trust deed investing the capital appreciation could be very low if you are not careful, as well. When if you are lending someone a loan for an investment most of the time the profit that you will receive will most likely come from the interest the will incur on said loan.
Dennis Dahlberg Broker/RI/CEO/MLO
Level 4 Funding LLC
Arizona Tel: (623) 582-4444
Texas Tel: (512) 516-1177
NMLS 1057378 | AZMB 0923961 | MLO 1057378
22601 N 19th Ave Suite 112 | Phoenix | AZ | 85027
111 Congress Ave |Austin | Texas | 78701
About the author: Dennis has been working in the real estate industry in some capacity for the last 40 years. He purchased his first property when he was just 18 years old. He quickly learned about the amazing investment opportunities provided by trust deed investing and hard money loans. His desire to help others make money in real estate investing led him to specialize in alternative funding for real estate investors who may have trouble getting a traditional bank loan. Dennis is passionate about alternative funding sources and sharing his knowledge with others to help make their dreams come true.
Dennis has been married to his wonderful wife for 42 years. They have 2 beautiful daughters 5 amazing grandchildren. Dennis has been an Arizona resident for the past 40 years.