Most real estate investors start the process by deciding what kind of investors they want to be. One traditional path to investing in real estate is to buy properties, fix them up and resell them. While this can be lucrative, it is also very time-intensive and can be risky. There is another path, though. Instead of being the owner, why not invest in first trust deeds? You can invest in real estate by providing money at generous rates of return to the people that get their hands dirty.
Buy, Fix and Hold Investing
Going the traditional, labor intensive path requires three things:
- A piece of investment property to buy
- Equity capital for a down payment on the real estate investment
- A lender to provide debt capital for the remainder of the purchase price
You can find properties through direct lender connections, direct contacts to owners, or through a real estate broker. Typically, real estate investors look for properties that can be bought at a significant discount, leaving enough room to cover acquisition costs, carrying costs, remodeling costs and disposition costs while leaving enough room for a healthy profit.
Given the difficult lending environment for many investment properties, finding capital can be the challenge. Since many traditional bank lenders are unwilling to lend on vacant properties for rehabilitation, you might have to tap into the private mortgage market. These lenders will make it easy for you to apply and qualify, but they will usually expect you to have a sizable down payment.
Investing in First Trust Deeds
Investing in first trust deeds is a completely different experience from being a traditional property investor. Instead of finding a property and fixing it, you wait for real estate investors to find properties that they want to fix and lend them money to help them do it. You will have the opportunity to review the borrower to which you lend money, analyze their ability to repay the loan, and review an appraisal of the property to ensure that there is enough collateral to support your loan. Many real estate investors will also make generous down payments that frequently exceed 30-40 percent of the transaction's value.
In exchange for making these loans, you can expect to collect interest payments that are around 10 percent, and the first trust deed note on the property is in your name. If this path is of interest to you, I highly recommend you align yourself with a trusted private money lender who can help find and put together these viable investment opportunities for you.
