Deed of Trust Investing

[Murali P.]

I am looking at trust deed investing through companies like The Norris Group (in CA) and Arixa Capital (also in CA). Anyone here already doing this with them or through other reputable companies and what has been your experience, good & bad..... Thanks.

[Aaron Norris]

We made the list! :) Honestly, I'm a trust deed investor as well. Some investments I do in my ROTH IRA so I cannot invest in trust deeds here at TNG because it would be a disqualified transaction. All that to say you got me thinking about what I look for when I do trust deeds.

1. Pool vs Whole-Note Investing - This is a personal preference and one that's different for everyone. Some like pooled investments because they can get in with very little money and they feel that the investment is diversified. Just be aware pools work really well until they don't. You're getting a blended rate of return and don't have much control over the product that is being selected to back your money. And an investment's quality is location, property type, and experience/quality of the borrower. Doing whole notes, you'll get a lot more detail about those three things. In a pooled investment, depending on the company you're working with, you're not getting that detailed. In a pool, you're given rough guidelines in what is allowable and who they loan to. Some companies will give you a little more but it just depends on the company. You just want to be comfortable with the product. As my dad says, It's called hard money because it took someone a ton of work to put those funds together to lend it out.  TNG tends to attract those that like more control and they like whole notes and only first trust deeds. They want to select the properties they invest in and if anything were to happen, they have control over what to do and don't have to rely on a bunch of people they don't know to make a decision. I only do whole note investing and I much prefer getting more detail and having the ability to have more control. WARNING: if you're working with crowd-funders, absolutely make certain you are backed by a first trust deed and it is recorded!!! If you read the fine print, some companies give you claim against the cash flow, but not the property. Not sure why that is and I'm a little surprised. Also, know that in pools, you want to make sure that the way to pool is structured allows management to get paid. Some people wanted to get into the business so bad, they created offerings where they wave fees and then they don't take a management fee. The example in a waterfall structure (this can totally change for every pool), the manager takes 2% fee, lenders get 7% preferred on top of that, and they split anything over the 9% combined. Well, if they were structured to only get points on loan origination and no management fees, what happens if the market softens and loans start going bad and no new origination is taking place? They can't pay employees, they can't pay bills, and they can't pay themselves. That's not a good recipe. So just make certain you understand the product AND the structure of whatever investment you're looking at.

2. Track Record - Look for companies that have survived cycles and have worked a good amount of time in the area you'll be investing. You've got a TON of new options out there with crowd funding and so many new lenders getting into the private lending space. It's great for borrowers because it's driven down rates in states like California. Not so good trust deed investors because the return isn't as strong. BUT, that means you have to be very concerned about quality and track record. The tendency in hot markets is to throw caution to the wind and get more aggressive in favor of the borrower. You'll see really high ARVs or borrowers really maxing out using seconds and sometimes too much leverage at one time. When a lender has survived a few cycles, it shows they know the market, their trust deed investors and borrowers trust them, and all work together to adjust their strategies and funding requirements to benefit all parties. When you're working with national brands that have to create programs nationwide, I'm not certain they can really adjust quickly enough to niche markets like California. 

3. Automation - The goal of trust deed investing is ease. I don't want to deal with late payments, I don't want to deal with tenants or toilets, and I don't even care that much if I hear from the company I invest through (that was weird for me to type).  Most of our trust deed investors are actually landlord converts that are tired of that game but they understand real estate so love notes and funding other people running that race. they just don't want to face-to-face with them. Their entire goal is to be hands off because they have a life to enjoy. If you do 1. and 2. wrong above, the experience might not be the automated, hands-off experience you're expecting. Bonus points if the company can direct deposit and I definitely want to work with someone who does tax property checks and makes certain that real estate investors have the CORRECT insurance on the property. Um, those last two pieces are very important, don't screw that up.  

Hope that helps. Just some of the things that are important to me.