California trust deed investing allows people to make investments in real estate and secure high returns while doing away with the need to actually own or maintain any properties. The investor simply has to provide funding to someone else who is buying the property. The concept is essentially the same as institutional mortgage lending, but modified to facilitate lending by individuals.
It sounds like a sure thing, but there's a lot to be learned before signing off on any investment. Investors typically go through a mortgage loan broker or MLB who arranges financing for individual homebuyers and professional real estate investors. Those using the funds may be REITs, developers or simply other investors who are open to owning properties.
There are several things that need to be figured out carefully while considering whether to accept a proposal. The valuation of the property is a good place to start, followed by a title search. Factor in the amount of loan required to come up with the loan-to-value ratio, equity and the margin of safety. The last piece of the puzzle is the borrower's creditworthiness and capability to repay the loan.
Most of this is the same standard due diligence that mortgage lenders do when providing a housing loan. Instead of a mortgage agreement, the lender gets a deed of trust and a promissory note. The latter is proof of the debt owed, and the former puts up the property as collateral against this debt.
Investors, borrowers and brokers need to be compliance with certain regulations put in place by the California Department of Real Estate. One of these rules stipulates that investors cannot shell out more than 10% of their net worth, or their annual earnings. It's also necessary to maintain the loan-to-value ratio at a healthy percentage (typically around 65%). The remaining 35% difference between the valuation and the loan amount sought is the margin of safety.
It's important to maintain this margin at a sufficiently high level to mitigate risk. If the borrower defaults and is unable to repay the loan, then the property has to be foreclosed on and liquidated to recover the loan balance. In such cases, a big margin is essential to cover the principal amount and interest due, along with all the legal costs.
In some cases, there may be other loans on the property. The borrower's equity will then be different as compared to the protective equity available. Junior lenders then have to consider the costs of clearing delinquency on senior loans and foreclosure. Investors need to familiarize themselves with these and other such issues. A lot of this knowledge comes naturally to people who have a few real estate transactions under their belt.
New investors are advised not to give their hard earned money directly to borrowers or unknown investors. Do some research and get in touch with the Department of Real Estate to find out all the applicable regulations and compliance issues before doing anything else. After that, go through an MLB or REIT with a good reputation in California trust deed investing to ensure solid returns without having to take on too much risk.
It sounds like a sure thing, but there's a lot to be learned before signing off on any investment. Investors typically go through a mortgage loan broker or MLB who arranges financing for individual homebuyers and professional real estate investors. Those using the funds may be REITs, developers or simply other investors who are open to owning properties.
There are several things that need to be figured out carefully while considering whether to accept a proposal. The valuation of the property is a good place to start, followed by a title search. Factor in the amount of loan required to come up with the loan-to-value ratio, equity and the margin of safety. The last piece of the puzzle is the borrower's creditworthiness and capability to repay the loan.
Most of this is the same standard due diligence that mortgage lenders do when providing a housing loan. Instead of a mortgage agreement, the lender gets a deed of trust and a promissory note. The latter is proof of the debt owed, and the former puts up the property as collateral against this debt.
Investors, borrowers and brokers need to be compliance with certain regulations put in place by the California Department of Real Estate. One of these rules stipulates that investors cannot shell out more than 10% of their net worth, or their annual earnings. It's also necessary to maintain the loan-to-value ratio at a healthy percentage (typically around 65%). The remaining 35% difference between the valuation and the loan amount sought is the margin of safety.
It's important to maintain this margin at a sufficiently high level to mitigate risk. If the borrower defaults and is unable to repay the loan, then the property has to be foreclosed on and liquidated to recover the loan balance. In such cases, a big margin is essential to cover the principal amount and interest due, along with all the legal costs.
In some cases, there may be other loans on the property. The borrower's equity will then be different as compared to the protective equity available. Junior lenders then have to consider the costs of clearing delinquency on senior loans and foreclosure. Investors need to familiarize themselves with these and other such issues. A lot of this knowledge comes naturally to people who have a few real estate transactions under their belt.
New investors are advised not to give their hard earned money directly to borrowers or unknown investors. Do some research and get in touch with the Department of Real Estate to find out all the applicable regulations and compliance issues before doing anything else. After that, go through an MLB or REIT with a good reputation in California trust deed investing to ensure solid returns without having to take on too much risk.
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