Blue Diamond Documents is proud to share an article written by Bruce Silverman of Home Path Financial.
We thank Bruce for sharing his vast knowledge with us. If you have any questions please don’t don’t hesitate to contact me or Bruce directly. Thanks and Enjoy…
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 many 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 very disappointed with their IRAs or 401Ks low, or flat, returns and are looking for something better. Because the primary goal is security they are putting their money in CD’s, Bonds and Treasuries. The problem with these investments is that the yields are extremely low, and after inflation is factored in, actually lose money! So the million dollar question is where can I get security, double-digit returns and cash flow? The answer is 1st Trust Deeds. 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, ever pending “Debt Crisis”, an extremely unstable Europe and a scandal ridden and corrupt Wall Street overseen by an ineffectual SEC.
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 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 around 3.5%. 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, or a total of $18,000 in income. This income would be growing tax free if held in a SDIRA.
As a Real Estate transaction one of the issues is Loan to Value, or what is commonly referred to as LTV. 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.
The simplest and most common way to invest in Trust Deeds is to find an established rehabber and flipper of single family houses like Home Path Financial, LP (HPF) who has been doing this since 2004. 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 Real Estate Investment Trust (REIT) and there are no commercial properties involved. 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 liability insurance, all to protect you, the lender. The borrower will even pay the $300 yearly fee to maintain YOUR Escrow account. 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 into the Escrow account until the next property is purchased when the process starts again.
The contracts are usually 18 months and you have the opportunity to renew. Most investors do renew and some of our lenders have been with us 2, 3 or even 4 years. You will be contacted three months before your contract is due to expire. If you choose not to renew, all draws from the Escrow Account cease, all works in process are completed and all remaining houses sold. Your entire investment is returned at the end of the contract. No investor has ever lost money with HPF and we 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. We at Home Path Financial, LP have been doing this for 8 years, and while we have done work in other States, 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 4 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.
To find out more information about using Trust Deeds as an alternative investment strategy contact Bruce Silverman at Home Path Financial, LP. His phone number is 770-842-2015 or you can email him at firstname.lastname@example.org.