There is an old adage in investing no matter what you are investing in; “Buy Low and Sell High”. This is especially true with Real Estate as we are now at a bottom and prices have not been this low in many years. Recently Warren Buffett said if he could, he would buy every single family home he could get his hands on. There is a lot of money being made right now “flipping” homes, and in a lot of ways it is much better than owning rental properties, because the profits are realized in a very short period of time. In fact there is even a television show called “Flip This House” that some of you may have seen. There are professional rehab companies that are purchasing, rehabbing and selling these single family homes all over the country. You can take advantage of this unprecedented opportunity by becoming a “Passive” Real Estate investor. What I mean by “Passive” is that you can make a very good return as a Lender and don’t have to be directly involved in the process. Many of these rehab companies use private money to help them fund their projects, often from investors using their Self Directed IRAs.
Let’s face it, investors today are looking for security, cash flow and a good interest bearing investment like CD’s or Bonds, but with a much better return! Every investor should consider having Trust Deeds in their portfolio as they offer that security, pay three to six times what CD’s or Bonds pay and provide great cash flow. They also offer a solid alternative investment strategy for people discouraged by our weak economy, an extremely unstable Europe and a scandal ridden and corrupt Wall Street. Many investors are simply not satisfied with their IRAs or 401(k)’s low, or flat, returns and are looking for something better.
A 1st lien Deed of Trust is the security instrument tying a loan to a piece of Real Estate and is recorded at the courthouse in the County that the property is located in. Different States have different descriptions for the legal documents associated with mortgage lending and the actual description is “A Trust Deed Evidences a Promissory Note Secured by Real Estate.” When investing in Trust Deeds there are several things to keep in mind. First you are becoming a lender but with returns considerably higher than conventional financing. As a matter of fact a 30 year conventional loan is now less than 4%. A Trust Deed will typically pay a lender 8-12% A.P.R. with the interest payments being directly deposited into the lenders account on the 1st of each month. The interest rate is usually determined by the amount invested and the term of the contract. As an example a $100,000 investment, with an 18 month contract and a 12% A.P.R., would create $1000 a month in cash flow with a total of $18,000 in income.
As a Real Estate transaction one of the issues is Loan to Value, or what is commonly referred to as LTV. LTV is basically the amount of money that is loaned vs. the value of the property that the loan is secured by. As a private investor you want to protect yourself with an LTV of no more than 75%. This will give you an equity cushion in the rare case of default. In the case of a default you would foreclose on the property and keep it as a rental or sell it and realize the net gain.
One simple, lucrative and safe way to invest in Trust Deeds is to find an established rehabber and flipper of single family houses like Home Path Financial, LP (HPF). This way you are working with an established business and not private individuals. This will also exclude you from the many restrictions placed on lenders when doing loans on owner occupied properties. This is considered Commercial, or private lending as you are lending to a business. You are the Lender and HPF is the Borrower. HPF works on a 90-120 day sales discipline so the projects are designed to move quickly and therefore maximize profits.
There are many levels of security with this type of investment. You are provided with a Loan Agreement, Promissory Note, Master Deed of Trust and a Supplemental 1st lien Deed of Trust for each specific property you lend on. This is not a REIT or Real Estate Investment Trust and there are no commercial properties involved. Unlike REITs, you as an investor have a first lien on real property, so the worst case scenario is that you end up with this property as an investment. There is no co-mingling of funds and you are the lender on separate and specific single family properties. Funds are held by an independent 3rd party Escrow company and only distributed upon approval by you. The borrower pays all costs associated with the purchase of the property including closing costs, Title insurance and H/O insurance, all to protect you, the lender. Before completion the house is referred to one of our network of Realtors and marketing begins. After the house is sold the funds go back in the Escrow account until the next property is purchased when the process starts again.
Home Path Financial has defined a solid method for investors to participate in the great returns of real estate flipping while staying passive through Trust Deeds. Home Path offers contracts that are 12 to 18 months with an opportunity to renew. Most investors do renew and some lenders have been with Home Path for 2, 3 or even 4 years. Investors are contacted three months before the contract is due to expire. If an investor chooses not to renew, all draws from the Escrow Account cease, all works in process are completed and all remaining houses sold. At the end of the contract the entire investment is returned to the investor. Home Path Financial prides themselves that no investor has ever lost money with their program and in fact, they have never missed, or even been late, with an interest payment.
One other thing you may want to consider is the area that the rehabber is working in. You want to be in a stable area where prices have already bottomed out and there is a good job market. You can invest in Trust Deeds anywhere, and may have a comfort level in your local area, but some parts of the country are significantly better than others. Home Path says “In over 7 years of doing this, we have worked in other States and we have identified Texas as the best area in the country right now and are concentrating our efforts there”. 50% of all the jobs created in the U.S. in the last 3 years have been created in Texas and it is absolutely one of the best areas in the country to purchase, rehab and sell single family homes.
This article was contributed by Home Path Financial (HPF). HPF has been in business since 2004, has an immaculate track record, done over 13 million dollars in transactions and has an A+ rating with the BBB.