What is the margin of safety in a trust deed investment?
The margin of safety is the difference between the loan amount and the value of the underlying property.
The core concept of trust deed investing is that if the borrower does not perform, the lender can foreclose on the property, thereby recouping their investment, plus any past due interest.
If the loan is sufficiently conservative, i.e., the property value is high relative to the loan amount, then the investment should not lose money even if the borrower defaults on the loan.
A well-structured trust deed investment might have a loan-to-value ratio of up to 70%, which would equate to a 30% margin of safety if the property’s value should decline.