Realty Q&A is a weekly column in which Lew Sichelman, a nationally syndicated columnist who has been covering the housing market for more than 40 years, responds to readers’ questions on real estate.
WASHINGTON (MarketWatch) — Question: I am new to trust deed investing. Is there a particular property niche in which I could get started for, say, $500 to $1,000? How does someone like me — someone who knows trust deed investing is a wise and sophisticated investment — start with but a small reserve? —N.J.
Answer: I turned to William Mencarow, publisher of the Paper Source newsletter, for your answer. A long-time investor in notes backed by real estate and other collateral who worked on Capital Hill years ago, Mencarow’s monthly publication is filled with heady advice and how-to articles, from the experts for the experts — and beginners just like you.
He suggested that as a first step in debt investing, you should pay off your own liabilities. Say you owe $1,200, which you are obligated to pay back at 10% interest over the next two years, or $55.37 a month for 24 months. If you purchased your own debt by persuading your lender to take $1,000 right now, you are putting an extra $55.37 in your pocket every month.
That means you created a monthly income stream of $55.37, producing a 29% interest “yield” on your own money. “That’s better than any trust deed investment, and you would never have to worry about default,” said Mencarow, who is now based in Kerrville, Texas.
If you are debt-free, then skip the above and consider several small steps you can take to begin investing in trust deeds, which are legal documents which transfer specific interest in the title to real property to a trustee. The trustee holds the trust deed as security for a loan or debt between the two parties.
Trust deeds are commonly used in Alaska, Arizona, California, Colorado, Idaho, Illinois, Mississippi, Missouri, Montana, North Carolina, Tennessee, Texas, Virginia and West Virginia.
Most other states have mortgages, which are filed differently but with the same results. However, a trust deed differs from a mortgage because there are three parties — the borrower (trustor), lender (beneficiary) and trustee, who purchases an interest in the property from the borrower. If the trustee is paid as promised, he no longer has any claim to the property. But if the borrower defaults, you take over the mortgage and the property is yours.
Mencarow says there are several ways to invest small amounts in trust deeds. But his rule of thumb is this: Never, ever buy a note secured by something you wouldn’t want to own yourself. That’s not the same as a property you wouldn’t want to live in yourself. There are plenty of good, solid houses that would make wonderful rentals but may not be in the location you’d like to reside or have enough room for you and your family.
Private money is a commonly used term in banking and finance. It refers to lending money to a company or individual by a private individual or organization. While banks are traditional sources of financing for real estate, and other purposes, private money is offered by individuals or organizations and may have non traditional qualifying guidelines. There are higher risks associated with private lending for both the lender and borrowers. There is traditionally less “red tape” and regulation.
Private money can be similar to the prevailing rate of interest or it can be very expensive. When there is a higher risk associated with a particular transaction it is common for a private money lender to charge an interest rate above the going rate