Are First Trust Deeds Basically Seller Financing?
I just wrote a blog post entitled: Should I Invest In Rentals Or 1st Trust Deeds / Notes / Private Money? and I received a couple of comments from DeeDee Riley and Jane Peters wanting to know:
"Are first trust deeds basically seller financing?"
To answer that question, not all first trust deeds are seller financing, but most of the time, sellers who offer seller financing will do so using a first trust deed as a security instrument. There are occasions where sellers carry a small second trust deed, but I do not recommend investing in second trust deeds for obvious reasons.
The first trust deeds I was referring to as another way to invest in real estate (besides buying rental property) is offering private money loans on real estate (homes, condos, apartments, land, etc.) These loans are done solely based on equity in the property, not on factors that financial institutions use like credit scores, income verification, etc. The borrowers will typically have a lot to lose if they default on the loan and most likely will be able to sell it for much less than what is owed.
Your success investing in private money loans depends upon several factors:
- Finding the right properties to invest in.
- Getting an accurate property appraisal.
- Loaning no more than a 75% LTV ratio.
Here are some scenarios where investing in private money loans makes more sense than investing in rental properties:
- If you calculate the net cap rate on a rental property to be less than what you can earn by investing in private money (usually around 10%). If you collect the payments yourself, there are no expenses associated with private money loans. However, tere are expenses incurred with rental property, such as property taxes, HOA dues, insurance, etc.
- If what you are primarily looking for is a steady stream of income without the hassles of dealing with tenants, repairs, vacancy, etc. that comes along with owning rental property. It's almost like collecting rent while not being responsible for maintaining the home.
- If you don't have the time to hire contractors to make repairs and renovations on rental properties, especially if they aren't located nearby. Sometimes, a seemingly "easy" repair job can turn into a disaster if you hire the wrong contractor.
- If you don't want to manage rental property and don't have a relationship with a property manager that you can trust with your investment. Ever heard of the long-distance property manager that tells you they can't find a tenant while they've been pocketing all the rent?
- If you can't seem to purchase a rental property because there is too much competition and you are always getting outbid based on the purchase price that will bring you the cap rate you're looking for. You could have been earning 10% on your money all this time that you've been making unsuccessful offers.