Individual Trust Deeds
Trust deed investments are loans secured by real estate, often times referred to as mortgages. Trust deed investments are made of 3 components:
- Promissory Note – similar to an “IOU”. A promissory note outlines the interest rate, repayment terms and conditions of the loan. It is a legally binding contract which can be used in a court of law if the borrower defaults on the loan. In essence, promissory notes demonstrate responsibilities and obligations of the borrower.
- Deed of Trust – a written instrument legally conveying property to a trustee used to secure an obligation such as a mortgage or promissory note.
A deed of trust contains three parties:
- The Trustor or borrower
- The Trustee, an entity that holds legal title, generally a title company that holds the “Power of Sale” in the event of default.
- The Beneficiary, which is the lender.
- Title Insurance Policy – a policy issued by a title insurance company that provides legal and financial protection against unknown risks. A title policy insures a lender’s priority of positions in the chain of title.
Benefits of Trust Deeds
Trust deed investments offer an unusual combination of high returns with a secured investment. Trust deeds are safer than other investments of comparable yield because the risks are identifiable, and so are the procedures necessary to counter them. They are an excellent way to diversify a portfolio. Plus, unlike publicly traded real estate related securities, trust deed investments are straightforward and easy to understand.