Put not your trust in money, but put your money in trust.
–Oliver Wendell Holmes
Every day during the past few months, words such as “market slide,” “declining confidence,” and “murky forecast” have characterized the headlines on financial pages across the country. In such volatile times, even the most experienced and savvy investors are nervous. Occasional Wall Street rallies have provided only short-term rebounds in the midst of an ongoing bear market.
An alternative to investing in the stock market is investing in deeds of trust. A deed of trust is a real estate-secured transaction known for delivering a high return on investment. After the close of escrow, a deed of trust gives investors a vested interest in real property, which is then recorded in the county recorder’s office. Although no investment is without risk, these deeds of trust offer predictable returns over a pre-determined term, with a full return of principal upon maturation. In the past decade, many investors have seen a 12 percent to 13 percent rate of return.
To protect yourself and your money and before choosing to invest in deeds of trust, you must become educated in three key areas:
First, consider your own needs and goals as well as your personal investment philosophy. What are your cash flow requirements? What are your expectations of the interest rate and other economic factors? What is your tolerance for risk? Understanding these things and knowing what you expect to get out of an investment can help you determine which firm to invest with and the type of investment.
Next, research several different mortgage companies that offer deeds of trust as part of their investment portfolio. Having faith in a mortgage company and confidence in its business philosophy is an important first step in investing. To start, seek out recommendations from people you respect, and consider the value of a strong word-of-mouth endorsement. Look for other investors who are pleased with their returns and the attention and service they have received.
When inquiring about mortgage companies, there are important factors to consider. Here’s what to look for and questions to ask:
Experience and expertise: How long has the company been in business? What is the professional work history of its principals? Does the company have good management, good future prospects? Is there a history of legal action against the company from either borrowers or lenders in the past five years? Check with the Nevada Department of Business and Industry’s Financial Institutions Division. Is the company licensed to do business in Nevada and/or registered with the Securities and Exchange Commission (SEC)?
Track record of the loans’ performances: A company may say it has never experienced a loss, but question why – does it make up for a bad loan by paying for it out of its own pocket? Loans must stand on their own merit. What projects has the mortgage company financed and were they successful?
Loan underwriting guidelines: Are its investments registered? What are its criteria for making loans, and what standards are loan applicants subjected to? Does it take risks or is it conservative? Does the CEO approve the loans?
Customization of investments: What types of products are offered? Does the firm offer opportunities that fit with your goals and objectives? Does the company have a history of working with clients of your level of investing experience? Is there a staff member dedicated to monitoring the loan on a daily basis?
Finally, after considering your own needs and researching several companies, you’ll also need to investigate the types of deeds of trust offered — individual deeds of trust or pooled investments. With individual deeds of trust, you, as the investor, have more control over the investment. You have the ability to choose which specific loan you want to fund. Thoroughly investigate the loan, the property, the principals and all aspects of the project. Review property maps, zoning, the project’s history and the surrounding area. Is the project feasible for the market? Who is the competition?
With pooled investments, such as mutual funds or real estate investment trusts (REITs), the investor has less control over the investment because a fund administrator selects which loans are funded and pooled. Additionally, such mortgage companies charge management fees for this service. To learn more about the company, review its prospectus, and research with the SEC and the North American Securities Administrators Association.
The savvy investor realizes that investing in deeds of trust has its risks. However, there is a long-term track record of great return. In this time of economic flux, do your homework. As people who invested in the technology sector have discovered, it pays to be well informed about where you put your investment dollars.
