With CDs paying around 2% and the yield on the S&P 500 a little lower than that, 11% returns from mortgage investing may sound too good to be true. The truth is, they’re not. What you need to understand is what types of borrowers are willing to pay those higher rates, and why.
- Self-employment. The vast majority of borrowers going to a mortgage investment lender for a loan are doing so because they’re self-employed. Even if they’re very successful businesspeople, and have good credit and equity, they may not have the option of using a big-name bank if they can’t show consistency of income on tax returns over past 3 years. Those banks won’t give them a loan, even if they’re willing to pay a higher rate than the standard 6% or 7%.
- Time-sensitive opportunities. As the old saying goes, time is money. The traditional mortgage business may take 6 weeks or more to process a loan—and therefore, long enough to miss out on a deal. Case in point, we had a recent client in North Carolina in the mental health business who had an opportunity to acquire another mental health institution in South Carolina. He needed the money within 10 days, and we were able to connect him with a private investor, accelerate the process, and close the deal on time.
- Blemished credit. In some cases, an otherwise-worthy borrower with an excellent opportunity may have less-than-perfect credit. Obviously, this presents more risk, which we overcome with a higher interest rate and more required equity in the property to protect us and our investors.
Add it all up, and trust deed investing is a competitive business where rates of 11% match the borrowers’ needs with the investors’ requirements for safe, consistent income. Any rate much higher than that, and you should be concerned that there is a higher degree of risk. And at any rate lower than that, you could be missing out on an opportunity.