Let’s hear from Liz about her experience with trust deed lending
Depending on factors detailed below, Stewardship borrows capital between 6-9% interest on a deed of trust. Such an investment is referred to as TRUST DEED LENDING because the collateral given is a deed of trust on the property loaned against. Investment advisers are not at all thrilled with trust deed lending because it is not something they can get a fee on since it is not a regulated security like trading in the stock market or buying bonds.
Why the interest rate spread
When we began to borrow private capital back in the early ’90’s we generally did so at 9% interest. Over time, and especially recently, we have found so many private lenders that we literally became “a washed” in money sources. This has allowed us to 1) lower our cost of funds, but also to 2) give our private lenders more options. Currently we borrow at the following rates with the following collateral for private loans:
7% Interest: 1st trust deed loans–collateral in 1st position.
8% Interest: 2nd trust deed loans–collateral in 2nd position on high cash flow properties.
9% Interest: On a collateral note assignment–see below.*
*A collateral note assignment is on a mortgage we own rather than property we own. All borrowed funds come with a note/personal guarantee and trust deed or note assignment.
A trust deed is different from a warranty deed. A warranty deed conveys ownership while a trust deed conveys collateral rights to the lender in the case where the borrower doesn’t follow through on his/her loan obligation. Having a trust deed means that you have a lien on the property in whatever position that lien is in (usually a 1st or 2nd position). In the worst case scenario, when the borrower stops making payments, the lender can take back the property as their own. (Something that has never happened with us.) So, while trust deed lending is not a no-risk situation, it is a low-risk situation.
You should be clear about one other aspect of lending. Being a lender means that you have NO liability regarding the property or the tenants in any way. Only the owners have liability. This is an important benefit of lending and it leads some real estate investors to eventually leave investing themselves to become lenders to other real estate investors. Of course there are other reasons investors become lenders… property management being high on the list!
What’s involved in the process of initiating a loan to us?
After talking with us and reviewing our information, here are how things usually work:
1) You consider how much you would like to loan, usually between 40-80,000 per loan.
2) We send you a “lending packet” via email to check out, ask questions and get comfortable with the property on which your loan will be collateralized. For a sample lending packet, CLICK HERE
3) We prepare the documents in Eugene. Depending on the particular deal–whether we already own the property free and clear or we’re closing a Fannie Mae/Freddie Mac/HUD foreclosure, etc.–we connect with an escrow company in Kansas City.
–NOTE: Describes the interest rate/terms between the lender (you) and the borrower (us). PERSONAL GUARANTY: You are backed by our company and by Bill Syrios personally.
–DEED OF TRUST or NOTE ASSIGNMENT: This document backs the loan up with the property as collateral in the very unlikely case of a default.
–ADDITIONAL INSURED: You are named on our insurance policy. This protects your loan.
–PAYMENTS/STATEMENTS: For convenience sake, we set up your monthly payment for automatic withdraws from our account to yours via ACH. Each year we also send you and end-of-year statement for tax purposes.
You actually do not need to sign anything. Bill signs the note, the personal guaranty and the 1st deed of trust which is subsequently recorded in the county the property is in. Your funds usually go through an escrow closing via a wire or a check. Whatever date the loan is made is the day we make the loan’s due date and start paying interest payments to you on a monthly basis beginning one month after the loan is made.
The note specifies all provisions of the loan and includes a provision to “roll over” until it is actually called by the lender (you) so we don’t have to redo the note in the case when it has come due but neither the lender (you) nor borrower (us) wants to see it paid off just because it is due. We’ve found that most lenders want the interest to keep coming in and not be interrupted with the principal payoff.
The payments are interest-only so your principal stays intact from the day of the loan until the day of the payoff. All of the paperwork and accounting takes place from our Eugene office.
Contact me at any time–Bill: Bill@StewardshipLLC.com or 541-221-4242. For an accounting, paperwork or IRA/401K question, contact Amanda Perkins, our operations manager. Her office number is 541-343-6000, ext. 200 or Amanda@StewardshipProperties.net. Her cell number is 541-517-9065.
How about if you have an emergency and need your money back?
Upon request we will return your funds within 30-days and usually sooner if you desire to give you total flexibility.
Borrowing private funds allows us to later put together a number of loans (lets say ten of them on ten different houses) and go to a bank for a larger loan that they are much more willing to loan us. Borrowing bank funds lowers our long-term cost of funds to 5-5.5% interest for ultimate goal.
At this point those ten private loans are paid off and the principal returned to the private lenders who have loans on those particular properties. Then, if the paid-off private lender wants to keep loaning us funds, we send him/her another “lending packet” with another property for collateral to duplicate the process. In time this new loan with also get paid off by a refinanced bank loan and the succession continues, likely for a very long time to come.
At any given time we own properties free and clear or are soon closing on upcoming purchases which provides are ready source.
Why don’t you secure bank loans from the start?
Well, sometimes do, but private loans are often easier to obtain. Banks got so burned in the foreclosure debacle of the late 2000’s that they now have strict guidelines which makes it more difficult to borrow money to purchase rental properties. (This is actually good for us because it keeps a lot of our normal competition who doesn’t have a ready source of cash out of the marketplace.)
Here’s one of a bank’s tough guidelines: They will only lend on 75% of the purchase price. So, if a property cost us 50,000 to buy and we put 25,000 into it, a bank will only loan us 75% of the 50,000 purchase price not of the 75,000 we have into it–OR of the likely 90-100,000 it is now actually worth. How this works out practically is that a bank is only really willing to loan no more than 50% of the after rehabbed/rented/appraised value of the properties we own.
But it even gets worse: If we were to initially secure such a bank loan on a new purchase, we would have to go through all the paperwork banks require including submitting financials, getting an appraisal, making sure the inspection passes their approval, etc. etc. The bank is unhappy–they would only be making a 37,500 loan (in the above case), less than some car loans! Likewise, we are unhappy because it takes us a LOT of time and energy to get a very small loan. This is a classic lose/lose situation.
Borrowing private money, on the other hand, allows us to bypass banks and move quickly in securing a good deal for cash. Because we’re borrowing money at higher interest rates from private lenders, however, we want to eventually lower our cost of funds and refinance with a bank at around 5-5.5% but, as mentioned above, this is where the refinance comes in and the opportunity to loan the funds back to us on another purchase.