Trust deed investing is becoming more and more popular for several reasons. First of all, the returns are quite good, especially compared to alternatives. A savings account currently yields less than 0.5% and even long term federal debt instruments only yield about 2% per year. In contrast, trust deeds can yield 5 times as much per year for the same amount of money. However, many investors still question which type of Trust Deed Investing to pursue. Some like to use a fund structure while other prefer a note structure. Each has its advantages and disadvantages.

Let's start with the basics. When you invest in a trust deed, you loan money and secure the loan with a first lien on the real estate as collateral. Called a "deed of trust", it works like a mortgage; a private mortgage recorded by the county recorder that shows the investor as the beneficiary. Sometimes, the borrower's personal guarantee secures the loan in addition to the deed of trust. Trust deed loans involve three parties: the lender, the borrower, and a trustee selected by the lender. The trustee acts on the lender's behalf, holds the lien on the title to the property, and takes possession of the real estate if the borrower defaults. Trust deed loans are particularly popular in California because it is a non-judicial foreclosure state and the process can take just three months. Oh, the best part is that it costs nothing to invest in trust deeds.

Trust deed loans are not a new phenomenon. However, they are growing in popularity. It is a great way to earn passive income with little hassle. Smart investors always do their research. However, there is always more to learn. Here are 5 things you never knew about trust deed loans.

One of the most under-appreciated financial instruments available to the California real estate investor is the trust deed and the “hard money” associated with them. They are an excellent option used by experienced investors when a real estate deal is too unconventional for traditional lending institutions. In addition, they offer the same legal safeguards as traditional mortgages and usually come with a better degree of security.

What Are Trust Deeds?

A first trust deed is a financial document that transfers legal title of a piece of real estate to a trustee in return for a loan against the property by the trustee. A contract is signed that details the arrangement and if the borrower is unable to fulfill their part of the bargain, the property transfers to the lender.

Since traditional banks are not involved, the terms of these contracts can be almost anything that satisfies the borrower and the lender. Since the deals may involve some added risk, trust deed contracts generally have a slightly higher interest rate and require a lower loan to asset value.