Evaluating Loan Security in Trust Deed Investments: What to Look For?

When it comes to investing in trust deeds, the security of the loan in which they are investing is often the first thing on most investors’ minds. After all, when you invest in a trust deed, you are essentially becoming a lender that is providing capital that is secured by real estate. However, not every trust deed investment carries the same level of security. Understanding how to analyze the security of loans will help the investor make better decisions, minimize risk, and will ultimately contribute to a more robust, versatile portfolio.

Here is what you would want to look out for when analyzing the security of a loan in a trust deed investment.

1. Loan-to-Value (LTV) Ratio
   The obvious corollary of this is that the LTV ratio will be one of the most important factors in ascertaining how secure any real estate-backed loan is. The LTV ratio is simply the actual amount borrowed expressed as a percentage of the value. Doing the math easily enough, a property valued at $1,000,000 with $700,000 loaned against it would have an LTV of 70%.

Overall, a low LTV is usually safer because there’s more buffer between the amount of the loan and the value of the property. In the event of a default, it is easier for the investor to recover his principal by selling the property with a lower LTV. In trust deed investment, an LTV of less than 70% is somewhat regarded as relatively secure, but this may vary according to the market conditions and the type of property.

Tip: opt for loans with conservative LTVs, giving you a great chance of getting some kind of return in case of a borrower’s default.

2. Property Type and Location
   The type and location of the property that secures the loan are very instrumental in determining its security. Residential properties are considered to have more stable values as opposed to commercial properties, especially if the latter is located within a popularly established neighborhood. Commercial properties enjoy huge returns in a growing market but may come with higher risks.

Location is important, too. Properties in high-demand locations, or those with stable or growing populations, are usually more secure investments since they’re more apt to maintain or increase in value. Research the location of the property before committing to the trust deed investment, taking into consideration market trends and the employment rate, local amenities, and recent sales that have occurred in the area.

Tip: Target established areas with high demand and stable economic variables, or up-and-coming areas showing high demand.

3. Borrower Creditworthiness and Track Record
   Any loan is only as good as its borrower. While the investment is secured by property, the credit score and past payment history of a borrower determine the likelihood of timely loan repayment. Knowing the creditworthiness of the borrower and past experience-specifically for development or renovation loans-informs one of the stability of the loan.

When you invest through a fund, like the LBC Capital Income Fund, LLC Income Fund, it would usually engage in researching borrowers on your behalf to investigate their financial background and history of completed projects. This due diligence might reduce risk by approving only creditworthy borrowers.

Tip: Make sure the borrower has good credit scores, has relevant experience in similar projects, and a stable financial background so that the loan can be well-secured.

4. The Loan’s Exit Strategy
   The exit strategy in a trust deed investment refers to the way the borrower will pay off the loan once his loan term expires. Common examples include, but are not limited to, selling the property, refinancing with a conventional lender, or other revenue streams that pay the loan off. A well-articulated and realistic exit strategy will thus minimize the risk of default, due to the evidence that the borrowers plan for such an exit.

Before investing, appraise the viability of the exit strategy. For instance, in cases of selling, consider the current demand for the property type within the location. In refinancing, it needs to be ostensible that the borrower can achieve a minimum credit score and has enough equity to facilitate future financing.

Tip: The best loan would be one with a well-defined and achievable exit strategy that minimizes the risks of non-payment.

5. Position of the Trust Deed (First vs. Second Trust Deed)
   The position of the trust deed is one of the main considerations in investing in a trust deed because, if there is default, the position dictates the order of priority for payback. First-position trust deeds are considered to be far more secure in that the investor has primary claim on the property, meaning they’re first in line to recover their investment when it goes into foreclosure.

However, second-position trust deeds carry higher risk because they are subordinate to any first-position loans. In case of a foreclosure, the first-position lender gets repaid first before the remaining available funds go towards the second-position investor. Hence, usually, second-position trust deeds are granted at higher interest rates, reflecting a higher degree of risk.

Tip: First-position trust deeds provide greater security and lower risk in case of a default by the borrower.

6. Market Trends and Economic Conditions
   Real estate markets are cyclical, and the economic climate can have an impact on property values and loan security. During slow economic periods or adjustments within the real estate market, property values may indeed decrease, which may increase risks for the trust deed investor. Other variables that could affect the real estate marketplace and, therefore, loan security include inflation, interest rates, and the stability of the job market.

Such greater economic signs the investors should know about and try to avoid such a market which shows some sign of instability. Such a fund always remains conscious about the market trends, changing trends will change its policy of investment, thereby minimizing risks for investors.

Tips: Keep yourself updated with economic trends. Always bear in mind how interest rates and property values could affect your investments in a trust deed.

7. Expertise of the Fund Manager and Due Diligence Process
   The expertise, in the case of investing through a trust deed fund, lies with the fund manager for everything about loan security. A good and experienced fund manager will perform an extensive due diligence process-screening both the borrower and the property-and shape the terms of the loan with a view to the protection of the investors.

The portfolio management team of the LBC Capital Income Fund, LLC Income Fund has vast experience in investments in trust deeds and real estate lending. Their comprehensive due diligence typically includes the review of LTV ratio, property location, creditworthiness of borrowers, and economic trends. This tends to have multiple layers of risk mitigation and offers increased security position of each loan.

Tip: Invest with a fund having an experienced management team and transparent and comprehensive due diligence.

Why Trust Deeds with LBC Capital Income Fund, LLC Income Fund are Different

At LBC Capital Income Fund, LLC Income Fund, we believe loan security for our investors matters and have set strict standards to guarantee this. From our high-quality borrowers to our conservative LTV ratios and properties in solid markets, our trust deed investments are designed to protect your capital while generating an attractive rate of return.

Because of the competence and attention to due diligence by our team, investors can be confident that their real estate investment is truly backed by physical assets managed by professionals. From the newbie investor to the seasoned trust deed investor looking to diversify their portfolio with secured income-producing assets, the approach taken at LBC Capital Income Fund, LLC includes both growth and security. Book your call with us.