Is Investing in Trust Deeds
Risk Free?
At Pacific Direct Mortgage, we value transparency and believe in helping investors make informed decisions. Trust deed investing offers potential rewards, but like any investment, it comes with real and sometimes significant risks.
This article is dedicated to outlining those risks clearly. If you’re considering investing in private money loans, please read this carefully. While we present a whole range of Trust Deed opportunities, you must evaluate and accept the inherent risks before proceeding.
Why You Might Not Want to Invest in Trust Deeds:
- Borrower Default Is Always a Possibility
No matter how well-vetted a loan may be, a borrower may still stop making payments. Illness, divorce, bankruptcy, business failure, or life events can derail even strong borrowers. If the borrower defaults, it’s your investment and money on the line.
- Foreclosure Takes Time and Costs Money
If a borrower defaults, foreclosure is often the only remedy. This process may:
- Take several months (or longer in some cases)
- Require legal representation
- Involve court delays or complications
- Result in additional costs (advances for taxes, force placed insurance, legal fees)
- Face additional delays or legal hurdles if the borrower enters bankruptcy during the foreclosure process.
There is no guarantee that you will recoup your investment—even after a foreclosure sale.
- Property Values Can Drop
Even if a loan is made with equity protection, real estate markets can shift. If values decline significantly, the collateral securing your loan may no longer cover your investment. A high equity position today doesn’t guarantee safety tomorrow. The market collapse of 2008 is evidence of this where property values in some areas dropped up to 60%! Markets fluctuate causing values to increase or decrease.
- Liquidity Risk – Your Money Is Tied Up
Trust deed investments are not liquid. You cannot easily sell or exit your position early. If you need access to your capital unexpectedly, this is likely not the right investment.
- You Are the Lender
When you invest in a trust deed, you are acting as the bank. You are responsible for understanding the risks and obligations of that role. This includes the possibility of:
- Borrower non-payment
- Legal disputes
- Property damage
- Title issues
- Etc.
- There Is No Government Insurance
Unlike a bank deposit or insured security, trust deed investments are not guaranteed by any agency. You can lose your investment if the loan goes bad and the collateral doesn’t cover it.
- Servicing Mistakes Can Lead to Problems
Loan servicing must be handled correctly. Errors in collecting payments, managing insurance, taxes, or notices can delay or complicate your ability to protect your investment.
We use White Hat Servicing to minimize these risks, but human or administrative error can still occur.
- You Must Understand and Monitor the Investment
Even with our help, you are responsible for your due diligence. You should understand:
- The loan terms
- The property itself
- The borrower
- The risks
If these aren’t something you are comfortable reviewing or monitoring, trust deed investing may not be for you.
- Private Lending Is Not Entirely Passive
While less hands-on than owning rental property, private lending still requires some engagement. You’ll need to read reports, understand the property, respond to updates, and make decisions if things go wrong.
- No Guaranteed Returns
We cannot and do not promise returns. Past performance is not an indicator of future results. If a borrower prepays the loan early or a deal is restructured, you may earn less than anticipated.
Final Thought:
This is not a no-risk investment. You can lose money in trust deed investing, even if everything seems solid at the start.
I believe in this asset class and investment method and personally invest in Trust Deeds myself, but I do urge you to proceed only if you fully understand and accept the risks. We are not investment advisors. You should consult with your own financial, legal, or tax professional before investing.
By moving forward with any investment, you acknowledge that you are doing so voluntarily and at your own discretion.
Ken Walker
Broker and Co-Owner
Pacific Direct Mortgage
