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Trust Deed Investing

Trust Deed Investing






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Trust Deed Investing Trust Deed Investing Presentation Transcript

  • Trust Deed Investing With Sterling Pacific Financial Security. Innovation. Growth. December 2008
  • Presentation Overview
    • Brief Introduction to Trust Deed Investing
    • Why Trust Deed Investing is a Logical Choice for Many Investors
    • Choosing a Trust Deed Investment Company – Things to Consider
    • Sterling Pacific Financial and Your Clients
  • Trust Deed Investments in Brief
    • A trust deed – or deed of trust – is an investment instrument similar to a mortgage
      • Deed of trust secures a loan made to finance purchase or development of a subject property
      • Provides lender recourse in case of default
      • These private loans also known as “hard money” loans because they are secured by hard assets (collateral)
  • Trust Deed Investment Process
    • Investor (the lender) provides loan funding and receives monthly interest at a predictable, stable rate
    • Process is brokered and managed through a licensed company known as a TDIC
      • Licensed lender can avoid state usury laws and charge market-driven interest rates
  • Trust Deeds Versus Mortgage Loans
    • Trust deeds typically generate much higher yields than ordinary mortgage loans
    • Investments can usually be made on a fractional basis – one investor needn’t fund the entire loan
    • Whether a trust deed or mortgage loan/lien is used depends on state law
    • Recourse for lender in default situations is usually more straightforward
  • Real Estate and Portfolio Diversification
    • Public stocks have battered most portfolios – short term yields are needed to rebuild
    • Investors need diversification beyond stocks and bonds
    • Real estate has become more attractive for security, long-term growth – but is only really appropriate for some investors
  • Real Estate Investing Caveats
    • Real estate offers real diversification, but requires more expertise to evaluate
    • Costs of errors can be devastating
      • A single RE investment can account for most of a portfolio’s value (limiting diversification)
      • If leverage is used, risk increases substantially
      • If the investment is in a retirement account, tax laws add complexity
  • Trust Deeds as a Lower Risk Proxy for Real Estate
    • Trust deeds are tied to RE– benefits of collateralization with hard asset, but risk is shared with borrower
    • A good TDIC will be expert at choosing properties – investor can learn through them
    • Smaller minimum investments – easy to achieve true diversification across multiple projects
    • Unlike direct real estate investing, returns are immediate and stable
  • Credit Crunch = Opportunity
    • Banks’ tighter credit standards mean very few borrowers qualify
    • TDICs can tap many attractive lending opportunities ineligible for bank loans
  • Adjusted Annual Returns at 35% Tax Rate
    • At 3.5% inflation
    • At 5% inflation
  • Public Markets, 1998-2008
  • Trust Deeds Deliver Steady Returns, Beat Inflation
  • What Current Investors Like About Trust Deeds
    • Relatively secure and predictable, but returns beat inflation significantly
    • Monthly growth rebuilds wealth
    • Simple, transparent
    • Like RE investing without the hassles of ownership …
    • … and with the benefits of relative liquidity
  • What Current Investors Like About Trust Deeds
    • They can diversify across multiple RE projects with relatively small investments – without leverage
    • They can diversify into real estate without acquiring that expertise – or learning the hard way
  • Unfortunately, These Benefits Haven’t Been Universally Available
    • Private money real estate loan opportunities have been “under the radar,” not accessible to all investors
    • Sterling Pacific and its peers aim to expand access to quality trust deed investments
  • Risks of Trust Deed Investing
    • Secured by collateral, trust deeds are relatively low risk – but not risk-free
      • Borrower default
      • Property value decline or disparity with market
      • Real estate risks: tax and regulatory changes, neighborhood changes, interest rates, changing economic conditions
    • Choosing the right firm can minimize these risks
  • Choosing the Right TDIC
    • Still largely unregulated – reputation and track record matter most
      • Retained investors, repeat borrowers
    • Highest return not the only consideration
    • Market expertise, staffing, infrastructure
      • Local and general RE knowledge essential to identifying best investments
      • Recourse only protective if TDIC can effectively prevent/manage workouts and foreclosures!
  • Choosing the Right TDIC
    • Lending standards – LTV, etc
    • Investor qualification
    • Diversity of investment options
    • Capitalization – for fast action on prime deals, more options on refinance
    • Are the principals invested?
  • Sterling Pacific Financial – About Our Firm
    • Ten+ years as a TDIC
    • Dedicated investment committee with more than 40 years of real estate and lending experience
    • We focus on mid-risk, quality investments
    • We focus on markets we know well (primarily CA)
  • Sterling Pacific Financial – About Our Firm
    • Well-capitalized – so we can move fast
    • All principals invest – our goals are aligned with investors
    • We have a robust infrastructure – not a mom and pop
      • Experienced, well-managed loan servicing operation
      • Regular communications program
  • Our Borrowers
    • Have needs that banks can’t fill: short-term or bridge loans, fast turnaround, mixed use
    • Shopping centers, medical office buildings, apartment buildings
    • Borrowers’ projects are located within geographic areas highly familiar to Sterling
    • Many of Sterling’s borrowers are repeat borrowers with a long track record of real estate success
  • How We Evaluate Loan-to-Value
    • LTV is a measure of the protective equity in a property – lower LTV, lower investor risk
    • Sterling permits a maximum LTV of 75%
    • Credit history is not unimportant, but well-analyzed LTV provides more security
    • We also research title, determine the impact of any existing liens or other encumbrances
  • Typical Sterling Loan Terms
    • 12-36 months term
    • Interest only, with a balloon repayment of principal at the end of the term
      • At the end of the term, principal is returned to investor(s) (individual or fractional trust deed) or to the fund for reinvestment (mortgage pool)
  • Case Study: Speedy Medical Office Build-Out
    • Madera County medical group sought to build out 7,000sf building – with Office of Behavioral Health Services ready to lease
    • But, OBHS needed their space within seven months – too fast for bank funding
    • Sterling provided funding in 15 days, so project could proceed – and the community now has needed services
  • Case Study: Bridge Financing
    • Architectural firm owner ready to buy the Santa Cruz building he had rented for more than 20 years
    • Seller’s fast-close requirement almost left this highly qualified borrower’s firm homeless
    • A bridge loan from Sterling Pacific saved the transaction
  • Case Study: Mixed Use Shopping Center
    • A Fresno community’s big-box center was held up by lack of bank financing
    • Bank lending requirements couldn’t stretch to fit this mixed-use project – even though the entire community supported it
    • Sterling assembled a mix of financing programs for the project’s different components
  • Our Investors
    • Have never lost principal
    • Reinvest at over 90% rate
    • Are individuals, foundations, corporations, retirement plans and other trusts
  • Leadership and Innovation
    • We strive to lead the category in innovation and consistent results
    • Our level of capitalization and track record mean we get first pick of most local deals
    • We’ve invested in infrastructure throughout the lending lifecycle, including servicing and workouts (not just evaluating/funding)
  • Leadership and Innovation
    • Sterling far exceeds industry standards for transparent communication with investors
    • Our investment committee is an unusual advantage and provides broad lending and real estate knowledge
    • We offer products for different needs, including fractional deeds, mutual-fund-like mortgage pools
  • Comparing Sterling Investment Options Most Diversification/Simplicity ---------- > Most Selectivity/Involvement ----> Mortgage Pools Fractional Notes Individual Trust Deeds
  • Option 1: Funding a Single Trust Deed
    • Investor chooses best fit for investment preferences (rate, term, position, etc)
    • Capital must be committed for the full term of the loan (typically one-two years)
    • Sterling manages the entire process, paying interest on a monthly basis and returning or reinvesting capital at loan end
  • Option 2: Investing in a Fractional Deed
    • Investors choose among fractionalized opportunities (rate, position, percentage interest, project type, location, etc.)
    • Capital committed for loan term
    • Sterling manages the entire process for all fractional participants, paying interest monthly and returning or reinvesting capital at loan payoff
  • Option 3: Mortgage Pool
    • Increased diversification through collective investment in a deed portfolio
    • Sterling manages the pools – continuously investing funds into quality loans
    • Investors are paid a monthly yield – which can also be automatically reinvested
    • Minimum $25,000 investment (one year lockup)
    • Sterling’s simplest, lowest risk investment option
  • Sterling Pacific’s Mortgage Pools
    • The Foundation Fund, LLC
      • Open to CA residents only
      • Loans for California properties only
      • $500K net worth (net of home) or $250K net worth with $65K annual income
      • Open for investing through tax-advantaged accounts
      • Target yield 10-11%
    • The First Floor Fund, LLC
      • Open to all US citizens
      • Properties in AZ, CA, NM, NV, OR, WA
      • $1MM net worth (minus home) or income of $200K (individual)/$300K (couple)
      • No tax-advantaged account investing at this time
      • Target yield 11-13%
  • No Hidden Fees
    • There are no hidden fees or loads for any of our products
    • Sterling receives a portion of the interest paid by borrowers – which has already been deducted from the rate you’re quoted
    • In other words, what you see is what you get: the rate quoted is expected yield
  • Extending Tax Advantages
    • Trust deed investments combine stability with regular, substantial yields – an excellent combination for self-directed retirement or education portfolios
    • Income accumulates tax-free until withdrawal – taking full advantage of tax-deferral on income
  • Summary
    • Trust deeds are an excellent way to diversify a portfolio
    • Many of the benefits of RE investing, but fewer hassles
    • Choosing the right firm is crucial
    • Sterling Pacific Financial offers experience, integrity, and innovation – all backed by our track record
  • Sterling Pacific Financial Investment/Lending Contacts
    • Joshua Fischer, Managing Director [email_address]
    • Joseph DeNigris, Director of Bus Dev [email_address]
  • Notes