Trust Deeds: The Unsung Hero of Alternative Real Estate Investments
Trust Deed Investing has been around for decades, offering retail investors a variety of ways to invest in property development, with benefits such as diversification, capital preservation, and historically high returns. And yet it is still little earned and remains one of the least used alternative forms of real estate investment in an IRA. Private lending, such as through trusts, is sadly tarnished by dark ages of predatory lending practices and the false assumption that it is reserved for borrowers with bad credit and the extremely wealthy who can afford the risk to lend them.
There are two important factors that the public does not recognize. The first is that the government cracked down on the banking industry as a result of the 2008 housing bubble. To this day, it is one of the most heavily regulated industries at both state and federal level. Second, there are companies with years of experience that offer opportunities in fractional investments such as trusts. This essentially removes the capital barrier and turns them into passive investments for their customers.
The big picture is that fiduciary investments are highly regulated, have shorter holding periods, have lower minimum investment amounts, offer capital preservation, are generally passive and provide a steady income, making them an ideal investment for a long-term investment strategy. You may be wondering what are the risks? Every investment has it. Trusts are liquidity that comes from not being able to pay off your investment before the loan is due. You have to wait for the borrower to repay the loan and there is a risk that the borrower will default on the loan. If the borrower defaults and the property has to be foreclosed and then sold on an amortized investor basis, this process can take time.
Common strategies for mitigating this risk include diversifying your trusts across multiple borrowers, regions, and property types (commercial and / or residential). Low minimum investment amounts and shorter turnaround times make it easier to maneuver in the real estate market, which is essential when using old-age provision for investments. In a self-managed IRA account, the interest income from trusts is put together tax-deferred or tax-free (depending on the account), and with enough foresight, your steadfast income ability can also be used to bridge the income gap during your retirement years.
The main problem many retirees face is replacing the income they have earned from their work. The sources of income from pensions, social security, disability and income characteristics may still be insufficient; And unfortunately, not much thought is given to how to use the retirement savings effectively in later life. Imagine if you could withdraw $ 120,000 from a retirement account and make $ 1,000 per month over the long term without spending a penny of the $ 120,000. Sounds too good to be true, doesn’t it?
Let’s look at two scenarios side by side. In scenario one, a few years before retirement, you toss over $ 120,000 from another qualifying account into a self-managed IRA to invest in trust deeds; But how many do you think it would be wise to pay off a large portion of your debts, such as credit card debt or your home loan, which is $ 40,000. You can find a company that offers an annualized return of 10 percent. You may encounter a bad debt or two, but because of the low investment minimum, your portfolio will be diversified across multiple trust agreements. While the defaults balance themselves out, the others are still working and providing you with an income. As you get older, it’s no secret that your spending on things like health care can go up, resulting in higher payouts over the years.
In scenario two, all factors remain the same except that you choose not to pay off your debt when you retire in order to keep your full principal of $ 120,000. Now let’s look at how the numbers in scenario one and scenario two develop in the following diagrams:
The difference between the build up in scenario two and the decrease in scenario one is pretty shocking, isn’t it? You can see the potential of trusts if you have the tools and ability to maintain the integrity of your principal (you can’t rule out the unexpected). If you are now into the final years of life and want to invest your retirement savings in something with a smaller risk profile (i.e. lower return), you are far further from emptying your account completely. This could be a boon to any legacy you plan to leave behind.
It is important to find the right trust company that fits your retirement portfolio needs. As with any investment, proper due diligence and research is essential before making any commitment to any company. As you do your research and compare different companies, there are a few questions you can ask yourself that can help narrow down your options:
How passive should this investment be? This is important because not all trust investment companies offer the same level of service. If you’re okay with possibly getting more hands-on with the investment, you can consider companies that just broker the loan and then leave the servicing of the loan entirely to you, or with the help of a third party if you so choose. When you are retired, or at a point in your life where you no longer need an additional commitment, other companies will provide all the services necessary for the life of the loan, leaving the investment very passive for the investor.
What is your risk threshold? Trust Deeds can be offered in first, second, third, etc., positions. If your trust deed is not in the first place, it means that another loan or loans will take precedence over yours. If the loan defaults, the loan is not responsible for the previous loans in the first place, which could leave you vulnerable to the loss of all of your capital investment.
In which real estate markets do you want to invest? Trust investment companies differ in the regions and the type of real estate developments for which they are lending. Some only lend in their own backyard for fix-and-flip properties, and others lend in a specific region (i.e. West Coast, Southwest, Middle East, etc.) for both residential and commercial properties.
How much do you want to invest on each trust deed and at what rate of return? Some trust investment firms offer investment minimums from as little as $ 10,000 up to a requirement that you can cover the entire investment. Returns can also vary between companies and each investment they offer.
If you are interested in adding alternative real estate investments such as trust agreements to your retirement strategy, click here to schedule a no-obligation consultation. Until December 31st, the Preferred Trust Company will be renounce the Formation fee and Administration fee for the first year for all new accounts. Call us at 888-990-7982 or visit our website and apply online today to take advantage of this offer!
PREFERRED TRUST COMPANY, LLC (“Preferred Trust”) | 2140 E Kieselstrasse | Suite 140 | Las Vegas, NV 89123 | 702.990.7892 | www. PreferredTrustcompany.com | Financial Institutions Division of Nevada License No. TR1002. Preferred Trust fulfills the duties of a custodian and as such does not sell investments or provide investment, tax or legal advice. Preferred Trust is committed to protecting all non-public personal information provided to us by our customers. Preferred Trust collects, stores and uses customer information when we reasonably believe that it will help administer our business or provide services to our customers. We only collect and store customer information for specific business purposes and will inform customers upon request why we are collecting and storing the information. We use information to protect and manage records, accounts, and funds; to comply with certain laws and regulations; to help us design or improve our services; and understand the financial needs of our customers. Preferred Trust is an accredited member of the Better Business Bureau.
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