A trust deed investment (or “mortgage loan investment”) occurs when an accredited investor invests their money in a bridge loan made to a borrower. The loan is secured by a trust deed (or “deed of trust”) using the borrower’s real estate as collateral for the loan and ensuring the borrower’s repayment under a promissory note.
What are the benefits of trust deed investing vs. investing in the stock market?
Lower Volatility – Investing in loans secured by real estate tends to be less volatile than the stock market.
Hard Collateral – When you invest in stocks or bonds you are buying paper; whereas trust deeds are secured by a “hard asset” that can be identified by a property located at a physical address.
Strong Cash Flow – By investing solely in the stock market, you mainly benefit from the stock’s appreciation over an extended period of time. What you earn from stocks that pay dividends is often far less than what you can earn on trust deeds The dividends are paid quarterly and may be increased or decreased at any time. Trust deed investors are paid a set amount on a monthly basis for a specified period of time.
What is COASTERRA CAPITAL’s role in my trust deed investment?
COASTERRA CAPITAL works with the accredited investor and the borrower to facilitate the closing of the loan transaction. We work with the borrower to gather all the necessary documentation for the accredited investor(s) in order to meet the merits of the borrower’s loan request.
What form of trust deed investment does COASTERRA CAPITAL offer?
COASTERRA CAPITAL seeks out trust deed investments on trust deeds secured by either non-owner occupied residential or commercial real estate properties. We strive to be responsible in our lending and identify borrowers who demonstrate that they have a clearly defined strategy for paying off the loan.
How secure is a trust deed investment?
Your investment is secured by the borrower’s real estate as the collateral. The value of the collateral can fluctuate based on several factors. The lower the loan-to-value ratio at the time of loan funding, the lower the risk to the trust deed investor.
What is title policy and how is it used in my trust deed investment?
All trust deeds are insured by a title insurance policy which insures the trust deed investor against financial loss from defects in title to the real estate that is collateral for the trust deed.
Are trust deed investments considered liquid?
Assuming the accredited investor is in control of 100% of the trust deed, it may be sold by the investor to provide liquidity. The market to sell trust deeds, however, is not as fluid as purchasing a stock or bond as the supply and demand for a trust deed is not as high as it is for a stock or bond security. The sale of a trust deed may take more time than the sale of a stock or a bond; though much like owning a stock or bond, if an investor sells their trust deed prior to maturity, they risk losing the principal of their investment.
Liquidity may also be achieved by employing a strategy of “laddering” investments. A trust deed investor may choose to spread out their investments over multiple trust deeds with staggering maturity dates, allowing for cash flow based on an investor’s need for the capital.
Who is a typical COASTERRA CAPITAL accredited investor?
High Income Earners – Typical accredited investors include high income individuals who want exposure to the real estate market without the volatility of the real estate market but do not have time to invest in trust deeds on their own. Our investors will usually have more than $5 million in investable capital.
Individuals Nearing or in Retirement – Retirees or those nearing retirement are also among our accredited investors. These individuals have lower risk tolerances and typically seek protection of their invested principal along with steady cash flow.
With today’s low interest rates, why are borrowers seeking trust deed-secured loans from private sources rather than from banks?
Banks are Bureaucratic – Due to extensive regulatory hurdles imposed on banks, private lenders can take advantage of a niche to fund loans that are not necessarily riskier than what bank’s fund. These regulations can also cause banks to take up to two months to assess, underwrite and close a loan; whereas private money lenders will typically take only one to three weeks. Additionally, banks tend to be more rigid when lending to foreign nationals, individuals with multiple loans or professional investors.
What differentiates COASTERRA CAPITAL’s trust deed investments?
COASTERRA CAPITAL only lends on non-owner occupied properties located in the state of California, and only in highly desirable coastal or metropolitan locations, and is a "Value Added"project, such as a remodel, redevelopment or ground-up development and construction program.
Does COASTERRA CAPITAL handle the funds?
No, all funds are handled and disbursed by a licensed and bonded, nationally recognized Title Company Escrow and/or Loan Servicing Company.
Are appraisals performed on the collateral?
COASTERRA CAPITAL typically requests a formal appraisal on the property. If it is determined an appraisal is not necessary, we will provide each accredited investor with an internal assessment of value based on comparable sales or the property’s income.
Risks to Trust Deed Investing
What are some of the risks associated with trust deed investing? Some risks to trust deed investing include:
A drop in real estate values or error in valuing the property at the time the loan was made;
Fraud by the borrower or issues with the title; and
Lawsuits affecting the property.
What is the difference between investing directly in real estate versus a trust deed? Risk – Trust deed investments are considered to be at the bottom of the capital stack (less risk) as there is usually some invested equity at a higher risk above and beyond the loan amount. Real estate investments are considered to be closer to the top of the capital stack, and therefore at more risk, since they are typically subordinate to a trust deed.
Volatility – Trust Deeds are typically secured at a maximum of 70% of the value of the real estate. Ordinary fluctuations in the real estate value generally do not affect the trust deed’s position.
Return – Unlike investing directly in real estate, trust deeds have a cap (or “ceiling”) for what an investor may earn. The return is limited by the interest rate that the borrower pays on the trust deed.
Ease of Returns – Trust deed investing is less time-consuming and management-intensive than owning real estate. Landlords spend countless hours managing multiple tenants and collecting multiple rent checks; whereas trust deed investors may simply earn one (1) check directly from a landlord.
What happens if real estate values drop during the course of a trust deed investment?
As long as the value of the real estate being used as collateral for the trust deed is properly assessed at funding, typical market fluctuations will most likely not affect the position of the trust deed. If the real estate value drops below the unpaid balance of the trust deed (assuming there is a guarantee for the loan), the trust deed investor has the option of pursuing the guarantor for the difference between the value of the property and the trust deed balance.
What if a borrower files bankruptcy?
If a borrower files bankruptcy as well as an automatic stay on the foreclosure of the collateral, an accredited investor may ask the court for a relief from the automatic stay to seek the continuance of the foreclosure process. The relief ensures sufficient protective equity remains in the collateral to pay the amount owed to the investor. This process may take as little as three (3) months or as long as two (2) years. Bankruptcy does not typically affect the lien position and security of the lender and collateral. The loan documents signed by the borrower will usually have provisions that shift the burden of legal expenses paid by the lender on the borrower in the event that the lender must take collection actions.
What is the foreclosure process like? How difficult is it?
The foreclosure process in California can be either non-judicial (out-of-court) or judicial (in-court). The non-judicial foreclosure process normally takes about four (4) months to complete. Judicial foreclosures are not common in California and may be very costly.
The accredited investor must file a notice of default (or “NOD”) with the county. This records the borrower’s defaulted amount and the date on which the borrower must repay the amount owed. Three (3) months after the NOD is filed, the investor may schedule a sale of the property. The sale cannot take place any sooner than 21 days after the 90-day NOD period is complete.
The borrower has the ability to cure any payment defaults and stop the foreclosure up to five (5) business days before the scheduled sale of the property.
How To Invest in Trust Deeds
What is the minimum amount needed to invest in a trust deed?
The minimum amount needed for a trust deed investment is coverage for the loan itself. The loan amount, determined by COASTERRA CAPITAL, ensures that both accredited investors and borrowers receive a loan tailor-made to fit their needs.
What fees does COASTERRA CAPITAL charge its borrowers and trust deed investors?
COASTERRA CAPITAL charges its borrowers a fee of one (1) to four (4) percent of the loan amount. We may also charge our trust deed investors a servicing fee, which is calculated as the difference between the rate the borrower must pay and the rate the investor has paid on the transaction.
What is the duration of each trust deed investment?
The duration for each trust deed investment with COASTERRA CAPITAL varies. Typically, an investment in a trust deed may last between 6 to 24 months. This timeframe may be deferred in the event that the borrower delays paying off the loan or files bankruptcy.
How much yield may I anticipate from my trust deed investment?
Typically, COASTERRA CAPITAL’s trust deed accredited investors may anticipate a yield between 8 and 10 percent (Actual rates and returns are subject to change.)
Can I invest in a trust deed investment using my IRA or pension plan?
Yes! COASTERRA CAPITAL accepts IRAs, Simplified Employee Pension IRAs (or “SEP IRAs”) as well as a variety of other pension plans. Your IRA or pension plan must be with a self-directed IRA company. COASTERRA CAPITAL is happy to assist you in finding the right self-directed IRA company for your needs.
How are trust deed investment returns disbursed?
Accredited investors receive monthly or quarterly disbursements of the interest on their investment either via physical check by mail, a wire or direct deposit.
How many trust deeds can I invest in at once?
With COASTERRA CAPITAL, accredited investors may invest in as many trust deeds as they wish, provided they have the funds available to do so.
How do I apply to become a trust deed investor with COASTERRA CAPITAL?
You can start investing in trust deeds with COASTERRA CAPITAL today by calling 760-579-6198 or sending us an email. We will begin the qualification process immediately to determine if you meet our accredited investor eligibility requirements. Please be prepared as we may request copies of your previous tax returns, brokerage or bank statements, and/or your current financial statement.
Glossary
Who is an accredited investor?
According to the United States Securities and Exchange Commission, an accredited investor may take the form of a for-profit organization, partnership or charitable organization with assets exceeding $5 million; or an individual with either a net worth exceeding $1 million or an annual income exceeding $200,000 in each of the last two consecutive years.
An accredited investor may also take the form of a trust with assets exceeding $5 million; or other financial group including a bank, insurance company, business development organization, and small business or other registered investment firm.
What is a bridge loan?
A bridge loan is a short-term loan (up to one year) made to a borrower who requires immediate cash flow. This form of loan is backed by the borrower’s real estate as collateral for repayment. The loan funds act as a “bridge” between the borrower’s short-term goals and long-term objectives. Borrowers typically pay a bridge loan off by securing long-term financing from a financial institution, selling the collateralized real estate or by paying the loan off with cash they are expecting to earn in the near term.
Who is a borrower?
A borrower is a business or businessperson who receives a loan from a lender. The borrower signs a promissory note agreeing to pay the full amount of the loan plus interest back to the lender by a predetermined time and is subject to any penalties per the agreement.
What is a promissory note and how do you obtain one?
According to the California Bureau of Real Estate, a promissory note is a written promise to pay or, in some cases, repay a certain amount of money by a fixed time and typically provides for payment of interest.
A promissory note specifies the loan’s principal, interest rate, debt service (the frequency and amount of payments due) and maturity date (when a borrower must repay the principal); it also details what penalties are imposed should the borrower not repay the loan.
For an accredited investor to obtain a promissory note, he or she must make a loan or purchase an existing note. A private party making a loan is subject to the California State Constitution’s interest rate ceiling.
According to the California Office of the Attorney General, the California Constitution prohibits an interest rate exceeding 10 percent per year. (This rate applies to the unpaid balance of the loan.) However, if the loan is secured by real estate through a private real estate broker, the California usury laws prohibiting interest rates exceeding 10 percent per year do not apply. COASTERRA CAPITAL will act as a broker on these transactions thereby allowing for rates greater than 10 percent.
What is the difference between a broker and servicer? A broker is a firm or individual who charges a fee for facilitating the buying or selling requests of an investor. A servicer of a loan maintains records of payments and balances and disperses monthly or quarterly statements and funds from the borrower to the investor until the loan and interest are paid off.
What is a loan-to-value ratio?
A loan-to-value ratio (or “LTV ratio”) is the ratio of a loan to the value of an asset purchased. Financial institutions and other lenders typically use this to represent the ratio of the first mortgage lien as a percentage of the total appraised value of real property.
What is a Capital Stack?
The Capital Stack is the description of the total Capital invested in a project, including the debt and cash invested by the property owner. The Capital with the most risk is positioned at the top of the stack, while the remaining Capital is positioned in descending order with the lowest risk at the bottom of the stack. Higher positions in the stack expect higher returns but do so with greater risk.
What is a self-directed IRA?
A self-directed IRA is a retirement account for which all investment decisions are made directly by the account holder. With a self-directed IRA, the account holder has the ability to invest in a wider range of assets. Along with stocks, bonds and mutual funds available through a typical IRA, 401(k) or pension plan, an investor may choose to invest in real estate, private tax liens or a variety of other financial notes using a self-directed IRAs.
What is liquidity?
Liquidity is the ability to quickly convert an asset into cash. Trust deeds are typically short-term in nature and provide for better liquidity as compared to the purchase of other fixed income securities such as bonds. Liquidity is also known as marketability. Specifically, liquidity is the degree that an asset can be bought or sold without affecting the asset’s price. Assets that are easily bought or sold on the market are considered liquid assets.
What is a security?
A security is a tradable financial asset of any kind. A stock or bond security is a form of debt security. The holder of a debt security is entitled to the payment of the principal and interest as well as any other contractual rights under the terms of the issue. These debt securities are issued for a fixed term and are protected by collateral (ie. real estate).