TalkingMoney
By Michael Stewart
A Safe Place for Real Estate Investments
As the fallouts from the subprime market and
credit crunch begin to encroach upon the commercial real estate market, finding a safe place
to invest money while still making double-digit returns is
a priority. Many real estate-savvy investors have soured
on volatile Wall Street stocks and want greater consisten-
cy and higher yields than such tradi-
tional investments.
Trust deeds offer a creative real
estate investing avenue to clients
looking for high-yield income
investments. Whether you want to
bolster your savings or are exploring
options for earning retirement
income, investing in trust deeds is a
great way to earn a double-digit
return on your investment.
Trust deeds, like all investments,
represent a level of risk. However, following the business practices of con-
“Trust deeds offer a servative real estate lenders, an investor can reasonably estimate and
creative real estate minimize the risk of a trust deed or
investing avenue to mortgage transaction. There are three common types of
clients looking for individuals who make trust deed
high-yield income and mortgage investments: the investor who works alone, similar to
investments.” the stock/bond “day trader”; the
investor who works through a mort-
gage (trust deed) pool fund, which is
similar to a mutual fund; and the investor who regularly
transacts with an established, institutional borrower.
Some investors single-handedly look for opportuni-
ties to become the lender or “bank” in a trust deed
investment or in the purchase of existing trust deeds.
These investors seek loans that are reasonably secure
and produce regular, fixed payments that reflect excep-
tional yields.
The knowledgeable trust deed or mortgage investor often
produces yields that easily surpass typical stocks, bonds or
mutual funds, together with the consistency of regular, fixed
payments. However, many investors choose not to participate directly in these types of investments. Here’s why: The
trust deed investor is actually a lender and assumes the risks
of a debt collector. Borrowers may skip payments, interrupting the cash flow of an investment or may stop payments
altogether. Although foreclosure typically recoups the
investor’s capital outlay and results in a reasonable return,
foreclosures are sometimes time consuming and upfront
costs can be expensive.
Fortunately, there are two alternatives that allow
investors to receive many of the benefits of trust deed
investments while reducing the risks. One possible
option would be to gain an involvement in a mortgage
(or trust deed) pool with a professional trust deed
investment company. In this sense, investment in a pool
of mortgages is similar to the traditional mutual fund
investment. Diversification helps ensure both regular
cash flow as well as security of the investor’s original
capital involvement. Unfortunately, although mortgage
pools do help the investor to spread risk, this arrangement presents a disadvantage to the investor who wants
to maximize income. Although the yields on these
investments are still very competitive with stocks,
bonds and mutual funds, the returns can be significantly less profitable than individual mortgage or trust deed
investments. Another downside is the private investor’s
lack of up-to-date information about such important
issues as payment collection and loan defaults on specific investments.
Then there is a third investment method that provides
the investor with both higher yields and close control
over mortgage and trust deed investments while still
minimizing risk. This strategy is transacting with an
established, institutional borrower. An institutional borrower presents very profitable opportunities to the private investor. The institutional borrower signs both a
promissory note and trust deed in favor of the investor,
who receives not only regular, fixed payments that
reflect an excellent yield, but also the relative security of
transacting with a company that has a track record of
payments and has pledged substantial equities in real
estate as collateral.
Although mortgage and trust deed investments are not traditional investments, these vehicles can be significantly more
profitable and comparably secure.—SOCAL
The views expressed in this article are those of the author and
not Real Estate Media or any of its publications.
Michael Stewart is CEO of Irvine-based Pacific
Property Assets. He can be reached at
mstewart@pparealestate.com.
