Friday
Jun082012

How to invest in 1st Trust Deeds

Investing in 1st Trust Deeds, whether discounted notes or hard money loan is easy with a plan and proven recipe. The key is to work with a broker (unless you are already skilled and/or have the time to learn the business' management secrets). 

This asset class can carry a significant default risk if not properly mitigated. Success resets on one area--Protective equity---assuming the following:

  1. Honest Paperwork
  2. Thorough payer review
  3. Acceptable geography of the underlying real estate

How much is enough Protective equity? Think of equity as insurance--you want to have a low loan to value when you invest today since there are declining values in many parts of the USA. 

In my experience, 40% is the MINIMUM amount of equity to guard against losses and here is why...

  1. 20% is lost since defaulting borrowers don't leave clean properties. This is the standard reason banks in good times only lend to 80% LTV without Private Mortgage Insurance
  2. 20 to 30% additional "loss" do to declining values

For example we lent 100k on a new Palm Springs CA house in 2009. Value of realty then was 180K. 

When we foreclosed in Fall 2011, Value dropped significantly to 100K. 

Though some are not as bad as this example, it could be even worse in the hard hit markets like Las Vegas, Reno or even North California.

Bottom line? Safeguard your investment dollars with very conservative loan to values...50% is a rule of thumb currently.

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