Should I Invest In Rentals Or 1st Trust Deeds / Notes / Private Money?

Should I Invest In Rentals Or 1st Trust Deeds / Notes / Private Money?

With more and more people looking towards investing in real estate, the debate between rentals vs. first trust deeds is a frequently asked question that definitely should be considered. There are advantages and disadvantages to both types of investments and it really depends on what makes better sense for the individual investor.

Here are some comparisons between investing in rentals vs. first trust deeds:

• Rental income is determined by market rents; first trust deed income is determined by the prevailing "private money" interest rate (which is currently around 10%).
   
• There can be many expenses for rentals (such as property taxes, HOA dues, repairs and maintenance, utilities, management fees); there are typically no expenses for first trust deeds (unless you hire a loan servicer to handle payments).
   
• Rentals may have tenants who pay late; first trust deeds may have borrowers that pay late. Either way, there would also be late fees incurred.
  
  
• You may have to evict a non-paying tenant on a rental; you may have to foreclose on a non-paying borrower on a first trust deed.
   
• Tenants may only see their security deposit to be at risk if they default on paying rent. Borrowers have their entire downpayment to lose if they default on a first trust deed.
   
• With an unlawful detainer, you may or may not be able to collect a judgment from the tenant. With a foreclosure, you better hope that the property is worth (and sells for) more than the amount owed plus fees.
   
• There may be a vacancy period between tenants on a rental; there may be a no income period between loans on first trust deeds.
  
  
• Rentals can be month-to-month or have a one-year lease or more; private money terms may be anywhere between 3 months to 3 years or more.

• You may hire a property manager to handle your rental property; you may also hire a loan servicer (typically the mortgage broker) to handle your first trust deed.
   
• Landlords should either have a team of contractors to fix what may go wrong with the property or have a property manager who does. Private money investors typically do not need outside services to collect on their first trust deed payments.
   
• 10 years from now, who knows how much your rental property will be worth. 10 years from now, your $500,000 private money investment will still be worth $500,000.