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TODAY'S TRUST DEED INVESTING TIP:
Be Aware of Where We Are in the Real Estate Cycle
June 25, 2020
We here at Blackburne & Sons would very much be in your debt if you forward this short lesson in trust deed investing to your accredited investors friends. Thank you!
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Joke Du Jour
A male crab met a female crab at a party and asked her to marry him. She noticed that he was walking straight instead of sideways. Wow, she thought, this crab is really special. I can't let him get away. So, they got married immediately. The next day she noticed her new husband walking sideways like all the other crabs, and she got upset. "What happened?" she asked. "You used to walk straight before we were married.” "Oh, honey," he replied, "I can't drink that much every day."
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When investing in first trust deeds, there is a time to be aggressive and a time to be conservative. About every ten to twelve years, real estate values have historically swooned. Examples of this include the S&L Crisis, the Dot-Com Meltdown, and the Great Recession. The time to be aggressive and reach for higher yields is right after a major real estate crash, when property values have finally found a bottom. The problem with this approach is that you are likely to be financially terrified, after having watched your stock portfolio fall by 30% or more. Nevertheless, this is the time to be very aggressive with your trust deeds investments. As Baron Nathan Rothschild said back in 1815, "The time to buy is when there's blood in the streets.”
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By aggressive I mean investing in first trust deeds with a higher loan-to-value ratio (maybe even up to 75% loan-to-value) and investing in higher-yielding deals. I have often told my investors that I personally would never invest in any first trust deed yielding more than 9%; but if I were to ever violate that cardinal rule, it would be at the very bottom of some financial crisis, after real estate had fallen by 45%. At that point, real estate values are (highly) unlikely to fall much further.
On the flip side, the time to be conservative is when it has been, say, ten years since the last major swoon in values. If you need income, you can still stay in first trust deeds, but perhaps you should dial down your loan-to-value ratios. Maybe you accept a lower yield, say 7% or 8%, in order to attract a stronger borrower and a less-risky loan. A yield of 7% is still very attractive at a time when banks are paying less less than 1% on C.D.’s.
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Disclaimer:
Investing in first trust deeds involves substantial risk. Be sure to read the “Risk Factors” section of the Offering Circular carefully before investing. Foreclosed property almost always requires renovation, so be sure to maintain some liquidity. A substantial and prolonged decline in real estate values is possible.
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ANGELA VANNUCCI
President
angelav@blackburne.com
P: (916) 338-3232
F: (916) 338-2328
CA DRE #1425852 / NMLS #389465
BLACKBURNE & SONS
Realty Capital Corporation
4811 Chippendale Drive, Suite 101
Sacramento, CA 95841
CA DRE #00829677 / NMLS #103430
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Won’t you kindly forward this email to a few of your accredited investor friends?
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