Trust deeds may seem to be a fairly straightforward form of financial investment. You may have heard of them in passing without being certain exactly what they are. It’s also referred to as a private trust deed.
What are they? At the core, these private trust deeds are sort of like mortgages that are used by real estate investors to borrow money to purchase property or finance buildings. The “sort of” part comes from the fact that these private trust deeds are not exactly like the mortgage a homeowner might take from a bank or other mortgage lender to buy a house.
That said, private trust deeds are vehicles through which an investor or group of investors, through a broker, offers financing (sometimes through “bridge loans”) for the projects of real estate investors.
If you’re detecting a note of caution, there’s a reason. While trust deed investments have great potential for returns, it’s important to remember that the risk may be more than you’re willing to take on. This even goes for daring investors who have a particularly aggressive investing style.
They may have a number of issues that could be unappealing to the risk conscious: high loan-to-value ratios, internal expenses, lack of liquidity, and even situations where the managers of the trust deed avoid risk by putting all the weight on investors like you. These are just a few of the potential issues.
On the other hand, some trust deed investments avoid these pitfalls and represent less-risky prospects. However, it can be difficult to tell the difference without a trusted financial professional on hand.
It’s important to know what you’re getting into with any investment. Ask questions, keep your risk aversion well in mind, and request that your financial professional put the potential for any new investment in the context of your overall financial strategy.
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