One of the great advantages to Trust Deed Investing is that the individual investor gets to choose the level of risk and return with which he or she is comfortable. You can choose from very conservative investments with low LTVs and excellent borrower credentials that offer interest rates between 8% and 10%, or choose more moderate risk investments with returns between 13% and 20%. You can even own a Fractionalized Interest in notes with various risk profiles to "hedge" your investment in Trust Deeds.
At NorCal, we believe there are three important things to look at when analyzing a good Trust Deed Investment: The property, the borrower and the exit strategy. We suggest that investors choose residential real estate in areas they are familiar with. Borrowers should be well-qualified, with documented income, assets, good credit and employment. Finally, the borrower should have a viable exit strategy for your investment: either the proven capacity to refinance out of your loan or a working business model to sell off the property before the loan term expires. Typically, our loans have the following criteria: 60% Loan to Value or less, 12% or higher interest rate, 6-month term, Deed of Trust in first position, and a borrower whose credit score is above 680 with proven income, assets & employment. We have a comprehensive Underwriting Guideline that we use at NorCal Capital Management that you can download here. We use this to determine which loans are qualified by our standards for funding.
Typically, all loans we present to our Trust Deed Investors have met these qualifications. However, as stated earlier, some investments may have stronger assets qualifications than borrower qualifications. Accordingly, the interest rate offered (or amount of equity participation) may be greater. As a Trust Deed Investor, it's up for you to decide which investments suit your needs the best.