1st Trust Deed Investing?

[LRAO]

I was wondering if anyone here has experience investing in 1st trust deeds (TDs).

Basically, here's how it works:

1. A broker collects money from a pool of investors.

2. This broker lends out the money to a borrower. Typically, the terms are:
a. High interest
b. Short-term
c. Interest only, with a balloon payment due at the end of the term.

3. During this time, the investors collect interest payments, and then they get their principal back.

4. The broker makes his money by:
a. Origination fee
b. Taking a % of the interest for himself.

The particular broker I am looking at only lends to 1-4 unit properties.

Just wanted to get some info on this...

TIA!

[Martha]

Higher yields because of increased risk.

These loans are not made on the creditworthiness of the borrower, but on the value of the real estate. Therefore, you need to be sure you really have your arms around the loan to value ratio. It shouldn't be more than 50 to maybe a high of 65%. So who is doing the due diligence? The broker? What is the broker's history?

This is a security so the offering to investers should be accompanied by lots of disclosures and the investers will likely need to be "qualified" as in assets of over a million dollars.

I have left my real estate investing to direct ownership or through LLCs and limited partnerships. I have stayed away from trust deed/mortage financing through brokers because I never felt enough in control to do the necessary diligence.

[Patrick]

A friend of a friend of mine does this. He makes 10-14% on his money. In a couple of cases the borrower defaulted and he had to step in and complete the project. He actually made more in these cases because he got the contractor's share, but he knows how to build. It's not for everybody, but if you can do it, why not?

Patrick