Trust Deed and REIT investments are seemingly similar at first glance. They both utilize “crowdfunding” type platforms that open the door to commercial real estate investments at a lower “buy-in” than your typical real estate venture (i.e. rentals, fix-n-flips, etc.); and offer a steady stream of passive income. However, there are some key differences that you should be aware of when deciding which investment vehicle is best for your portfolio and for your tolerance for risk.
If you are unfamiliar with these types of investments or just a bit rusty, here is a brief synopsis of both. There are many different types of REITs; equity, mortgage, or a combination of both (hybrids), that can be publicly traded, non-traded, or private. Here we are going to focus on the most common, the publicly traded equity REIT; where the REIT fund managers purchase multiple properties to lease the space and collect rents. These properties are bundled into a fund where you purchase shares on the stock market exchange, and that rental income is then distributed as dividends to you as a shareholder. Trust Deeds are a debt investment. Hard money lenders, like Ignite Funding, work with real estate developers to broker and fund short-term loans for individual projects (i.e. acquiring land or a property, horizontal development, and vertical construction or rehabilitation) with private investor capital. You, along with many other investors, are lending your money to these borrowers, earning a return on interest negotiated by the broker.
Fixed vs Fluctuating Form of Income:
When you invest in Trust Deeds with Ignite Funding, you will earn an annualized 10% to 12% return paid out to you monthly at a fixed rate. This form of income is more likely to be steady because borrowers have a greater incentive to continue making payments. Borrowers that wish to maintain the success of their business and continue to receive lending for future projects will not tarnish their reputation by frequently defaulting on payments. Borrowers also understand that a hard money lender will foreclose and take the property back in a heartbeat, if necessary, to preserve investor capital.
REITs only pay dividends on a quarterly basis, with annual dividend yields averaging around 3% to 8%. Those dividends are contingent upon all properties retaining paying tenants who have less of an incentive to pay consistently or stay on the property. Any one of the properties failing to perform can be detrimental to the life of the fund, causing fluctuations and making this form of income much less reliable.
Trust Deeds are less liquid than REITs because of the nature of a debt investment versus an equity investment that is publicly traded. The trade-off for liquidity in Trust Deeds is that the property encumbered by the loan is collateral to your investment. Your name is officially recorded on the deed of trust and title insurance. This means that if a borrower defaults, you and the other investors participating in the loan decide how to proceed and can even foreclose and sell the property if necessary, with the guidance and execution handled by Ignite Funding. This helps mitigate the amount of principal you risk losing in the process, if any. In many cases, investors are able to come out of these situations whole, it’s just a matter of how long it will take until resolution is met.
In a REIT, there is no such collateral protecting your investment and you do not have a say in how things are managed if property performance declines. You have to hope that you are not selling your shares at a lower market value than you bought in, cutting into your principle and earnings. If the REIT altogether fails, you stand to lose all of your principle.
The Ability to Diversify:
Very few REITS have a mixed portfolio of property types, most tend to specialize in a specific real estate sector. They are either composed of all apartment buildings, all health care facilities, all hotels, etc. This limits your ability to diversify across different types of real estate in different regions. You are also relying on the ability of the REIT’s fund managers to choose profitable properties to fold into the fund.
When investing in Trust Deeds, you are in control of which project you are lending your money on. This creates the opportunity to diversify across different borrowers, development phases (acquisition, horizontal development, vertical construction, or rehabilitation), asset type, and geographical area. If one area of the market slows down, a diversified portfolio will contain other investments that should continue performing while the other works itself out.
In order to maintain REIT status, government requirements mandate that they must payout a minimum of 90% of income back to investors. This does not leave much for the fund managers to work with. To make up for this lack of capital they can charge base fees, performance fees, acquisition, and divestment fees, altogether digging into your overall earnings.
When you invest in Trust Deeds, the broker (Ignite Funding) is paid by the borrower through brokerage points for originating and servicing the loan. This means that you will see the full 10% to 12% annualized return on your investment. You read that right! There is no fee charged to you to invest in Trust Deeds.
Whether you are investing in Trust Deeds or REITs, you should always perform your due diligence on the company or the fund manager before you invest your hard-earned money. Look at the management team, their performance track record, and question if their interests are in-line with your own as an investor. You should also question yourself to gauge what level of risk you are willing to face, like with any other investment there are no guarantees.
Interested in learning more about becoming a Trust Deed investor? Schedule a FREE consultation with an Investment Representative at Ignite Funding by clicking here, or texting the word “Consult” to 844-552-7022.
Ignite Funding, LLC | 2140 E. Pebble Road, Suite 160, Las Vegas, NV 89123 | P 702.739.9053 | T 877.739.9094 | F 702.922.6700 | NVMBL #311 | AZ CMB-0932150 | Money invested through a mortgage broker is not guaranteed to earn any interest and is not insured. Prior to investing, investors must be provided applicable disclosure documents.
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