At the simplest level, trust deed lending is where a mortgage company (such as CapSource Inc.) finds and underwrites real estate loans for real estate developers. The mortgage company then assembles the funds required to close the loan. The funds are assembled from private investors who are seeking investment alternatives to what the traditional brokerage industry has to offer. Trust deeds offer a unique combination of security (in the form of real estate collateral) and monthly income at favorable returns. Trust deed investors may utilize funds from savings, IRA's or other self directed retirement accounts.
Trust deeds are short term loans meant to help real estate investors and developers buy properties quickly. They are willing to pay higher interest rates for short term loans (6-24 months on average) because private trust deed lenders are able to underwrite and close loans much more quickly than banks and other traditional lenders. An experienced mortgage company is able to recognize lending opportunities that are well secured, have strong sponsorship (i.e. qualified borrowers) with characteristics that indicate a high likelihood of sale or refinance in less than two years. When properly underwritten and structured, these loans are repaid before the end of the loan term.
What are the typical rates of return that investors can expect to earn on a trust deed investment? Investors can expect a fixed rate of return between 6 to 10 percent. This rate is much higher than the rates of CDs, money markets, or bonds. Both parties to the transaction benefit greatly from this investment mechanism. The borrower is able to obtain the money they need quickly, and the private lender enjoys well secured, monthly passive returns.