TRUST DEED INVESTING
" Trust Deeds - a fixed income investment that lives up to its name"
There is no mystery to trust deeds. They work much like other fixed income investments, such as bonds, with a few key differences. When you purchase a bond, you’re loaning money to a corporation or government. In exchange, you receive interest income throughout the term of the loan and repayment of principal at maturity. The loan is backed by the corporation’s assets or the full faith and credit of the government.
When you invest in a trust deed, you’re making a mortgage loan collateralized by the borrower’s assets and more specifically, their real property. This could be anything from a single family residence to an apartment building or office building. In return, you receive regular interest payments throughout the term of the loan and repayment of principal at maturity. Rama Capital Partners serves as liaison between the borrower and lender and ensures that the terms of the loan are fulfilled.
The chief difference between trust deeds and traditional bonds is that most fixed-income investments are misnamed. Bond markets can be highly volatile, seesawing with interest rates and other economic factors. Trust deed investors suffer no such uncertainty. The interest rate is typically fixed, meaning you get a consistent rate of return and have full transparency into what you are investing. Furthermore, our private loans typically boast above market rates of return with measurably less risk.
"An attractive core holding to provide uncorrelated, superior risk adjusted returns"
If investors weren’t already cognizant of the need for a diversified investment portfolio, after the recent “great correction” they most certainly are now. The most common way people diversify their portfolios is between equities (stocks) and fixed income (bonds), two asset classes that generally move in opposite directions.
However, astute investors seek additional diversification by further dividing their fixed income portfolio. This is where trust deeds play a critical role. While traditional bonds are considered “fixed income,” prices vary and sometimes dramatically so. However, if you place some or all of your fixed income investment in trust deeds – the returns for which are truly fixed – you add an element of stability, thereby lowering the volatility of your entire portfolio.
Diversification aside, investors should not overlook the investment opportunities in the real estate market itself. It’s a large and vital aspect of the economy and no portfolio should be without it. You include real estate in your portfolio for the same reason you include energy stocks, or retail or technology. Overlooking key economic sectors will create gaps in your portfolio, resulting in missed opportunities and lowered diversification. Trust deeds are a convenient and sensible way to take advantage of the opportunities of real estate investing, with much less risk and volatility than just purchasing the underlying asset.
The current income feature of trust deed investing is often a big part of what attracts investors. Although some choose to reinvest their income back into principal, many others rejoice in receiving monthly interest payments in the mail.
While trust deed investing is a more niche investment segment than many of its alternatives, Rama Capital Partners bridges that gap for its investors by managing all aspects of the process – from loan origination to payoff, providing a true seamless investment experience for our investors.
WHAT TO KNOW
"Before you invest in trust deeds, consider whether the potential risks and
rewards are consistent with your investment objectives."
Is trust deed investing right for me?
Trust deed investing is not for everyone. Minimum investment requirements will vary depending on the trust deed, but as a rule the entry requirements are higher than for most other investments. Ask yourself this question: Am I comfortable committing substantial assets to an investment for at least a period of one year? If you answer yes, then trust deeds may be suitable for you. We can review our investor accreditation standards with you and discuss whether trust deeds are consistent with your investment objectives.
What are the potential risks of trust deed investing?
No investment is entirely risk free and in the case of trust deeds, real estate values may fluctuate and borrowers on occasion may default for a number of reasons, which may potentially impair the timing of an investor’s cash flows. But good underwriters like Rama Capital Partners and Athas Capital Group can effectively manage those risks with their strong knowledge of the market, rigorous underwriting policies and sound business judgement.
Risk also varies among different types of trust deeds. Rama Capital Partners makes loans secured by first trust deeds only. A lender holding a first deed of trust is paid off first if the borrower should default and the property must be sold to satisfy the loan. Lenders in second position are paid next, and therefore face potentially more risk.
How does Rama Capital Partners manage risks?
Risk can be mitigated. A trust deed investment is only as secure as the underlying loan, which is a function of the strength of the underwriter. As the credit evaluator of each of its loans, Rama Capital Partners represents the investor to ensure all foreseeable potential risks of the investment are mitigated.
Our strict underwriting standards and awareness of the market are your insurance against potential risk.
(1) In accordance with the Fund’s Operating Agreement, loans may exceed 70% loan-to-value when the Manager has determined compensating factors to justify a greater loan-to-value ratio.