Investing in trust deeds has been around for decades, providing private investors with a myriad of opportunities to invest in real estate development and offers benefits such as diversification, capital preservation and historically high returns. And yet, it still receives little credit and remains one of the most underutilized alternative forms of real estate investing in an IRA. Private lending, such as deeds of trust, is unfortunately marred by dark periods of predatory lending practices, as well as the misconception that they are only for borrowers with bad credit and extremely wealthy people, who can afford to take the risk of lending to them.
There are two important factors that the general public does not recognize. The first is that, following the housing bubble of 2008, the government severely clamped down on the lending industry. To date, it is one of the most regulated industries at both the state and federal level. Second, there are companies, with years of experience, offering split investment opportunities as deeds of trust. This essentially breaks the capital barrier and makes them passive investments for their clients.
The big picture is that investments in trust indentures are highly regulated, have shorter holding periods, lower investment minimums, offer capital preservation, are generally passive and offer fixed income, which makes it an ideal investment to deploy for a long-term investment strategy. You might be wondering what the risks are? Every investment has it. For trust deeds, this is liquidity, which is due to the fact that you cannot cash out your investment until the loan matures. You have to wait for the borrower to repay, and there is a risk that the borrower will not repay the loan. If the borrower defaults and the property must be recovered by foreclosure and then sold to recover the principle of the investor, this process can take time.
Common strategies to mitigate this risk include diversifying your investments in trust deeds across multiple borrowers, regions, and property types (commercial and/or residential). Low investment minimums and shorter turnover times make it easier to maneuver in the real estate market, which is essential when using retirement funds to invest. In a self-directed IRA account, interest income from trust indentures will accrue tax-deferred or tax-exempt (depending on the account), and with enough foresight, their ability to generate fixed income can also be used to help bridge the income gap during your retirement years.
The main problem that many retirees face is how to replace the income they used to get from their job. Sources of income from pensions, social security, disability and income properties may still not be enough; and, unfortunately, not much thought is given to creating a strategy for how to use retirement assets effectively once we reach these final stages of life. Imagine if you could withdraw $120,000 from a retirement account and generate $1,000 a month of income in perpetuity without spending a penny of the $120,000. Sounds too good to be true, right?
Let’s look at two scenarios side by side. In the first scenario, a few years before retirement, you transfer more than $120,000 into a self-directed IRA from another qualified account to invest in trust deeds; but like many, you think it’s safe to pay off a lot of debt, ie credit card debt or your home loan, which amounts to $40,000. You find a company that offers annualized returns of 10%. You may encounter a default or two down the line, but due to the low minimum investment, your portfolio is diversified across multiple trust deeds. While the defaults are resolving, the others are still working and providing you with income. As you get older, it’s no secret that your expenses can increase for things like health care, representing increased payouts over the years.
In the second scenario, all the factors remain the same, except that you choose not to pay off your debts as soon as you retire in order to maintain your total capital of $120,000. Now let’s see how the numbers play out in Scenario 1 and Scenario 2 in the graphs below:
The difference between the accumulation in scenario two and the decline that occurs in scenario one is rather shocking, isn’t it? You can see the potential of trust deeds if you have the means and ability to maintain (you can’t ignore the unexpected) the integrity of your principal amount. Now, as you enter your later years and want to put your retirement savings into something with a smaller risk profile (therefore a smaller return), then you’re a long way from completely emptying your account. It could be a boon if you are planning to leave a legacy.
Finding the right trust investment company to meet the needs of your retirement portfolio is essential. As with any investment, due diligence and proper research is essential before committing to any company. As you do your research and compare different companies, you can ask yourself a few questions that might help you narrow down your options:
How passive do you want this investment to be? This is important because not all trust investment companies will provide the same level of service. If you are comfortable with the idea of potentially being more hands on with the investment, you can consider companies that will just broker the loan and then leave servicing the loan entirely to you or with the help of third-party repairer, if you so choose. If you are retired or at a time in your life when you do not need the possibility of additional commitment, other companies will provide all the necessary services for the life of the loan, leaving the investment very passive to the investor.
What is your risk threshold? Trust deeds can be offered first, second, third, etc. positions. If your investment in trust is not in first position, it means that another loan has priority over yours. If the loan defaults, the loan in first position is not responsible for previous loans, which could leave you vulnerable to a loss of your entire principal investment.
In which real estate markets do you want to invest? Trust investment companies vary by region and the type of real estate developments they will lend on. Some only lend in their own backyard on fixed, reversible properties, and others may lend within a certain region (i.e. West Coast, South West, Middle East, etc. .) on residential and commercial developments.
How much do you want to commit for each investment in a trust deed and at what return? Some trust investment companies offer minimum investments as low as $10,000 up to requiring you to be able to cover the entire investment. Returns can also vary between companies and on each investment they offer.
If you’re interested in adding alternative real estate investments like trust deeds to your retirement strategy, click here to schedule a no-obligation consultation at your convenience. Until December 31, the preferred trust company give up the administration fees and first year administration fee for all new accounts. Call us at 888-990-7982 or visit our website and apply online to take advantage of this offer today!
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