What Is An Investment Strategy?
In finance, an investment strategy is a set of rules, behaviors or procedures, designed to guide an investor’s selection of an investment portfolio. Individuals have different profit objectives, and their individual skills make different tactics and strategies appropriate. Some common examples of investment strategies include but are not limited to stocks, bonds, mutual funds, money market accounts, certificate of deposit accounts and trust deed investing.
What Is Trust Deed Investing?
Trust deed investing is simply investing in loans secured by real estate. Most trust deed investments are relatively short term loans (maturity under seven years, with many loans three years or less) made to real estate investors. Presently, banks are unwilling to make real estate loans unless they fit a very strict set of criteria.
They often do not want to lend to opportunistic real estate investors because the property which is collateral for the loan is not move in ready at the time of loan funding, or people have credit issues or people have low to no income documentation. For this reason, there is a niche of people that have limited financing options available to them, and lender to this market are able to command relatively high interest rates.
If structured properly, trust deed investments offer an attractive current yield with relatively low risk. Trust deed investors usually earn high single-digit annual returns, paid monthly. In some cases, returns above 10% or possible. These returns are very favorable relative to other investment options with similar risk profiles. The risk of losing money in a trust deed investment is mitigated by a built in margin of safety.
What Is The Margin Of Safety In Trust Deed Investing?
The margin of safety is the difference between the loan amount, and the value of the securing property, otherwise known as the Loan-to-Value Ratio. The core concept of trust deed investing is that if the borrower does not perform, the lender can foreclose on the property and sell it to recoup the investment, plus any pas due interest.
If the loan is sufficiently conservative, i.e. the property value is high relative to the loan amount, then the investment should not lose money even if the borrower defaults on the loan. A well structured trust deed investment might have a loan to value of 65%.