California Trust Deed Investments for IRA Accounts and Other Funds
Investors are tired of low returns and investments that they are not comfortable with.
They’re not seeing the benefits they planned on as they worked and saved the money. Carefully selected first trust deed investments can provide a way to earn more interest income and build an investment portfolio.
Trust deed investments are secured by real estate. Most investors want to invest in first trust deeds. California trust deeds are usually larger loans than second trust deed investments. If the real estate is located in a mid-priced to better area, the amount of the trust deed offered for investment may again be larger.
This brings us to fractionalized trust deed investments.
We frequently close hard money loans for apartment buildings. We just closed a first trust deed secured by a small apartment building. The loan amount - $188,500. There are two ways private money investors could have participated:
- One "whole loan" investor could have put up the entire $188,500 and been the sole owner of the trust deed.
There are other ways to offer trust deed investments in California, but we’ll cover just the “whole loans” and “fractionalized trust deeds” that are referenced in the two bullet points above.
What you should know: How do people invest in fractionalized trust deeds or “multi-lender” loans?
I'll cover some
common steps, but bear in mind that nothing said here represents an
“industry standard,” a "standard of care", or “the only right way” to do this. What I’ll
describe is one method of creating multi-lender loans. Here are the
- Or, various investors could have acquired smaller interests in what we refer to as a fractionalized trust deed or multi-lender loan. (This is what happened.)
- The loan broker or trust deed investment provider, usually a licensed private money lender or other properly licensed entity, finds a loan opportunity. These are generally referred to as California first trust deed investments, assuming they’re first trust deeds.
- California trust deed investment companies or loan brokers either fund the loan with their own money, or present the loan to investors, and the investors place funds into the escrow to close the loan with the borrower.
- The loan broker enters into a loan servicing agreement with the investors, agreeing to collect
payments, disburse amounts to investors, monitor tax and insurance payments, and
provide required year-end reporting.
- Instead of handling the loan servicing, the broker may have the investors enter into an
agreement with an independent third party loan servicing company, who performs the
note collection duties.
- In the event of delinquency or default, the broker or servicer notifies the investors, and upon
their agreement, instructs the foreclosure trustee to begin foreclosure proceedings, etc.
- Should problems arise, where decisions have to be made, the holders of a majority interest in the trust deed (51% or more), will determine what action is taken.
What are the advantages to investing in a fractionalized trust deed?
- The effects of a delay in payment, or non-payment by a borrower, or other collection problems are generally reduced by spreading the same amount of money over several trust deeds, rather than having a larger amount invested in one trust deed.
- If you have $90,000 invested in one trust deed and it pays off, you are completely “un-invested” until you find more trust deeds. When your funds are invested in several trust deeds and one pays off, you continue to receive interest on the other fractionalized interests you have in loans that did not pay off.
- More time to investigate, ask questions, think and decide:
A fractionalized trust deed, funded by the broker in advance, provides you more time to review and consider the investment, as the urgency of closing the loan for the borrower has been removed. The loan has already been closed and you are simply purchasing a percentage interest in the loan from the present lender.
Fractionalized trust deed investments can have problems. There are risks.
These may include, among others:
- Investor disagreement: Although the holders of a majority in interest in fractionalized trust deed investments (fractionalized loans) would make certain decisions about the investment, there are instances where investor disagreement could cause delays or challenges.
- One or more investors could fail to advance funds that may be needed to cure a property tax default, or to advance other funds needed to protect the investment.
- Should someone want the funds back prior to the loan paying off, a share of a loan will be difficult or impossible to sell. It should be noted that whole loans (ones where there is one investor and the loan is not fractionalized) may also be difficult to sell.
“You mentioned IRA Accounts. How does that work?”
IRA funds can be invested in trust deeds. First, it’s necessary to set up a “self-directed IRA,” which allows you to make appropriate, qualified investments with your IRA funds. Once the self-directed IRA is set up, you can then instruct the IRA “custodian” to invest certain amounts of the IRA in trust deeds.
How are fractionalized trust deeds structured?
There are a number of legal requirements for fractionalized trust deeds. There are also regulatory requirements imposed and enforced by the California Bureau of Real Estate. Among the requirements:
- Fractionalized trust deeds must be originated with a loan servicing arrangement in place, so that the loan servicer can distribute payments to the investors and perform other necessary loan servicing functions.
- Although the percentage interests of investors may vary, they all have to be treated equally, as to their percentage of ownership. For example, one investor cannot be given a higher return than the other investors.
- A recorded assignment of the fractional interest in the trust deed is recorded in the records of the county recorder of the county where the property is located.
Find out more:
Call Joffrey Long at (818) 366-5200 or e-mail us at email@example.com. For more information, check out www.TrustDeedInvestmentGlossary.com.
This is not an offer to sell securities, or an offer or solicitation to
invest in any trust deed, or in trust deeds in general. Trust deed
investments carry risk and are not guaranteed or insured. Joffrey Long
is not an attorney, and this should not be considered as legal advice.
Anyone engaging in any of the acts described in this writing should
consult with a qualified attorney. Before considering any investment in
trust deeds, you should carefully investigate a number of areas, among
- The suitability of trust deeds as an investment for YOU, based on your circumstance
- Trust deeds in general, the risks, disadvantages and limitations
- The provider, trust deed investment company, or broker who is offering you the investment
- The specific California trust deeds or type of fractionalized trust deeds (fractionalized real estate loans) being offered, and their suitability to your
Joffrey has owned and operated Southwest Mortgage since 1986. He is a member of the California Mortgage Association (CMA), where he has served as Chair of the Education Committee, a member of the Board of Directors and President of the association. Joffrey teaches
National Mortgage Licensing System continuing education courses for
loan originators, and is called upon from time to time to testify as a
mortgage expert witness or loan servicing expert witness.
17045 Chatsworth Street
Granada Hills, CA 91344-5845
(818) 366-5200 firstname.lastname@example.org
California Bureau of Real Estate Broker License Number 00898122
You can obtain other information about trust deed investing at: