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KNOWLEDGE CENTER

Trust deed investing, explained in plain language.

A plain-language guide to how trust deed investments work, how they're secured, and how to evaluate a trust deed investment opportunity. Written by DLS from 45+ years of underwriting and servicing California trust deeds.

THE BASICS

Start here.

What is trust deed investing?

Trust deed investing involves an investor lending money to a borrower — typically a real estate investor or developer — through a private loan. The borrower uses the loan as working capital to acquire or improve a property. The investor's name is recorded on the deed of trust, giving them a secured claim against the property if the borrower fails to repay.

Because the investment is collateralized by real property, trust deed investing is often classified as an asset-backed, income-producing investment. Returns come from monthly interest payments, not from property appreciation.

How a deed of trust works

A deed of trust is the legal document that secures the loan against the property. It's similar in function to a mortgage but uses three parties rather than two: the borrower (trustor), the lender/investor (beneficiary), and a neutral third-party trustee who holds title to the property on behalf of the beneficiary.

If the borrower pays as agreed, the trustee reconveys title back to the borrower when the loan is paid off. If the borrower defaults, the trustee initiates the foreclosure process and sells the property to recover the loan balance.

Who's who in a trust deed transaction
 

Every trust deed transaction involves four parties:
 

  • The borrower (trustor) — the real estate owner or buyer receiving the loan

  • The investor (beneficiary) — the lender of the funds, whose name is on the deed of trust

  • The trustee — a neutral third party who holds title and handles foreclosure if needed

  • The broker (DLS) — who sources the loan, underwrites the borrower and property, and services the loan for the life of the investment

RETURNS & COMPARISONS

Why investors choose trust deeds.

The benefits

Real estate is a tangible asset, and trust deed investors can generally expect high returns from trust deed investing. A well-selected trust deed is an ideal way to diversify your investment portfolio.

Investors can also benefit from the passive income earned during the loan period due to the borrower's interest rates. However, the real estate market ebbs and flows, which means trust deed investors need to consider their investment style, lending criteria, and personal goals to evaluate the risk involved.

How trust deeds compare to other investments

Trust deed investments sit between direct real estate ownership and fixed-income securities in the risk/return spectrum.

vs. Stocks: more predictable income, lower volatility, less upside, less liquidity.
vs. Bonds: typically higher yields, secured by a specific property rather than a corporate or municipal issuer.
vs. Direct real estate ownership: similar collateral backing without the burden of property management.

SECURITY

How trust deed investments are secured.

Loan-to-value ratios and collateral

The single most important protection in trust deed investing is the loan-to-value (LTV) ratio — the loan amount divided by the property value. A 65% LTV means the property must lose more than 35% of its value before the loan is at risk of being under-collateralized.

At DLS, most loans are underwritten to a maximum 65% LTV, meaning the property provides a meaningful equity cushion above the loan amount. Lower LTVs are possible for special situations.

Title insurance

A title insurance policy protects the lender's position against claims that may exist on the property before the loan is made — undisclosed liens, clouded ownership, easements, or other defects. Without title insurance, an investor funding a loan could later discover that a superior claim exists on the property, damaging their security. Every loan DLS underwrites includes a title insurance policy naming the investor as beneficiary.

Property insurance requirements

Every loan requires the borrower to maintain property insurance — typically hazard insurance at minimum, and flood insurance where applicable — naming the lender as an additional insured. This protects the collateral against physical loss during the loan term. DLS tracks insurance compliance throughout the life of the loan.

The foreclosure process in California

If a borrower defaults, the lender's recovery path is foreclosure on the property securing the loan. California is a non-judicial foreclosure state, which means foreclosure proceeds through the trustee without requiring a court proceeding. This is a significant advantage for trust deed investors compared to judicial foreclosure states — typical resolution within 120 days from the Notice of Default.

EVALUATION

How to evaluate a trust deed opportunity.

Inspecting the property and documents

Before funding any loan, an investor should review the property's loan documents and physically inspect the property against the loan agreement. Having the right professionals involved in your inspection — appraisers, construction specialists, and legal counsel where appropriate — helps ensure you're evaluating the property's true worth and condition.

After the physical inspection, expect to review loan documents. If you're uncertain about any document, don't hesitate to consult an attorney before funding.

First-position vs. second-position liens

A trust deed's position — first or second — determines the order of claims against the property in a foreclosure. A first-position trust deed is the senior claim; it's paid first from foreclosure proceeds. A second-position trust deed is subordinate to the first and is paid only after the first position is fully satisfied.

First-position trust deeds are inherently safer, but second-position trust deeds can offer higher yields and may be appropriate where the underlying collateral supports both loans with a meaningful equity cushion. DLS primarily underwrites first-position loans but also funds second-position loans where the structure supports capital preservation.

Questions to ask before funding a loan

Before funding a trust deed investment, a prospective investor should be able to answer:

01  What is the loan-to-value ratio, and what's the supporting valuation method?
02  Is this a first-position or second-position trust deed?
03  What is the borrower's exit strategy (sale, refinance, or cash flow from the property)?
04  Is title insurance in place, and am I named as beneficiary?
05  Is property insurance current, and am I named as additional insured?
06  What's the loan term, and what happens at maturity?
07  Who services the loan, and how do I receive payments?

APPLY WHAT YOU'VE LEARNED

Ready to apply what you've learned?

You've walked through how trust deed investing works, how it's secured, and how to evaluate an opportunity. The next step — if the investment makes sense for your goals — is a conversation with our team.

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