Before investing in a trust deed, you need to understand the ins and outs of a trust deed note. A trust deed note is the actual agreement that the borrower will sign that promises to pay you a certain sum of money in exchange for the home.   

You may think that you are investing in a trust deed note, but you are actually investing in the property that is secured by the trust deed. You are, in essence, loaning the borrower money to buy a house. You will be getting a certain percentage rate from the buyer in exchange for this generosity. The borrower will also have to pay you a certain amount towards the loan each month. The details of how and how much the borrower will pay you toward the trust deed will be worked out between you and the borrower. If you are using a broker, the broker can also help work out the arrangements.   

Interest is always paid up front with any mortgage or trust deed. If you are going to invest in a trust deed note, understand that you are essentially investing in mortgage. California is the only state in the union that calls their mortgages deeds of trust. The rest of the country refers to them as mortgages. Only use this term when investing in California because in the rest of the country, a trust deed is an instrument of conveyance.   

You will want to get the bulk of the interest at the beginning of the loan. It will amortize so that the buyer will be paying mostly interest at first, but by the end of the term of the loan, they will be paying mostly principal. The principal is the set amount of the loan. The interest is the fee you are charging for loaning them the money. Interest rates in the United States are around 5 percent. A private investor can get away with charging more, but only because they are dealing with the secondary market.   

The reason you want most of your interest up front is because if the buyer decides to sell the house prior to the end of the loan, you will have made out well with interest. There are no prepayment penalties allowed any more for paying off a mortgage or trust deed prior to payment as they are illegal. So this is the way for the lender to make their money.   

Understand that as a private investor, you should take stock in the home that the buyer is buying. You will want an appraisal and know that if you have to foreclose because the buyer does not pay his loan on time, you will be able to recoup your money. If the home is not worth anything, and the buyer takes off, you are left with a valueless house. Make sure that you know the home or property in which you are investing.   

For the most part, however, investing in trust deeds can be good income. You can get a good return for your money (much higher than a bank) and your investment is secured with property. It is very rare for property to ever lose value. If you cannot afford to finance an entire mortgage, you can enter into a joint venture with other investors and make a good return on your money.