For retirement investors interested in diversifying their real estate investment portfolios, knowing what a deed of trust is can be very important. That may be surprising to you, given that many self-directed investors have never even heard the term “deed of trust”. However, the odds are good that you have heard the term “mortgage note investing”. Note investing is one of the best ways to diversify the asset classes in your self-directed retirement portfolio without straying too far from real estate.
In this article, we will discuss what a deed of trust is and why understanding the concept matters for successful retirement investments.
A deed of trust is similar to a mortgage. A mortgage involves an agreement between a borrower and a lender that the lender will provide a certain amount of capital and the borrower will repay that capital over a predetermined period of time along with a predetermined amount of interest or turn over certain collateral (usually a physical property). Similarly, a deed of trust also involves a loan agreement and collateral. However, a mortgage note involves two parties (the borrower and the lender), while the deed of trust involves three (the borrower, the lender, and a trustee).
A deed of trust trustee has one function: to sell the property at public auction in the event that the borrower, sometimes also referred to as the trustor, defaults on their loan payments. The presence of a trustor in the mortgage note process can make the pre-foreclosure and foreclosure process much easier for the lender in the event of a default because the borrower has already agreed to the terms under which they will accommodate a foreclosure. This is why states that employ deeds of trust in mortgage notes tend to be nonjudicial foreclosure states, meaning that a foreclosing party, usually a lender, does not have to seek a foreclosure judgment in court prior to taking control of the collateral property and selling it at auction.
Individuals with self-directed retirement accounts often hold real estate investments in these accounts. Real estate is a particularly appealing asset class because it is safe, reliable, predictable, and, for the most part, profitable over the long term. As a result, self-directed investors often build large portfolios of real estate investments. However, most self-directed investors reach a point where they would like to diversify their investments. Most also do not want to stray too far from real estate, which is a familiar and relatively simple concept. Mortgage note investing, also frequently referred to as private lending, is a good option for real estate-focused investors. Creating private notes that include a deed of trust as part of the terms of the note can make the management and servicing of the note easier. Furthermore, in the event that the self-directed investor wishes to sell the note in the future, including a deed of trust may make the note more attractive to another investor.
At Mainstar Trust, we pride ourselves on providing access to the best information, education, and resources for self-directed investors. If you are ready to open a self-directed retirement account and start investing in real estate and real estate-related assets, contact us today.
Please note: Not all alternative investments require Accredited Investor status. Please review the private placement memorandum, subscription agreement, or prospectus for purchase.
Always take the time to consult with trusted, professional advisors to ensure you understand tax, legal, and investment issues related to the use of IRA funds in LLCs.