What Is A First Trust Deed?
Understanding the fundamentals of first trust deed investments
Understanding First Trust Deed Investments
A First Trust Deed is a form of real estate-secured loan where an investor provides financing to a borrower, and the loan is backed by a recorded trust deed against the property. It operates similarly to a traditional mortgage, but instead of a bank acting as the lender, a private investor or lending entity provides the capital.
Priority Position
The "first" in First Trust Deed signifies that the lender holds the primary lien position on the property. This means that in the event of a default or foreclosure, the first trust deed lender has priority over all subsequent lienholders when recouping the loan balance from the sale of the property.
The Three-Party Trust Deed Structure
Unlike a traditional mortgage which involves two parties (lender and borrower), a trust deed involves three distinct parties:
Trustor (Borrower)
The property owner who is borrowing the money and pledging the property as security for the loan. The trustor transfers the legal title to the trustee while maintaining equitable title (the right to use and enjoy the property).
Trustee (Neutral Third Party)
The independent third party (often a title company, attorney, or trust company) that holds legal title to the property until the loan is fully repaid. The trustee has the power to sell the property if the borrower defaults, without needing court approval.
Beneficiary (Lender)
The investor or lender who provides the funds for the loan. As the beneficiary, you are entitled to receive the loan payments and have the ultimate security of the property as collateral should the borrower fail to repay.
Key Information for Investors
Return on Investment
First Trust Deed investments typically yield 8-10% annual returns, significantly outperforming traditional fixed-income investments like CDs or Treasury bonds. These returns are paid monthly, providing regular income to investors.
Loan-to-Value (LTV) Ratio
One of the most important metrics in trust deed investing is the LTV ratio. A lower LTV (typically 65-75%) provides a significant equity cushion, reducing risk if property values decline. For example, a $700,000 loan on a $1,000,000 property has a 70% LTV ratio, giving you a $300,000 equity buffer.
Investment Term
First Trust Deed investments typically have terms ranging from 6 months to 3 years. This shorter time frame provides greater liquidity compared to many other real estate investments and allows investors to reassess investment strategies more frequently.
Documentation
As an investor, you'll receive several important documents: the Promissory Note (detailing the loan terms), the Deed of Trust (securing the property as collateral), a Title Insurance Policy (protecting your interest), and a Loan Servicing Agreement if a third party is collecting payments.
Protection in Case of Default
If a borrower defaults, your investment is protected by the foreclosure process. As a first lien holder, you have the legal right to initiate foreclosure and recover your investment from the sale of the property before any junior lienholders.
Common Usage
First trust deeds are typically used in private lending, particularly in real estate transactions where borrowers seek short-term financing for purposes such as property acquisitions, renovations, bridge loans, or refinancing.
Security Advantage
Since the loan is secured by real estate collateral, first trust deed investments are considered a relatively lower-risk alternative to unsecured lending. The property serves as a safeguard for investors.
Watch: Understanding First Trust Deeds
A comprehensive overview of how First Trust Deed investments work
First Trust Deed Investing Explained
This video explains the fundamentals of First Trust Deed investments, how they work, and why they provide both security and attractive returns for investors seeking alternatives to traditional investment vehicles.