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 (that is, pay back the loan on time, as agreed), the lender can foreclose on the property and sell it to recoup the investment, plus any past due interest.
If the value of the property securing the loan 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 (LTV) of 65%, meaning the loan is equal to about 65% of the property’s value.
For example, a trust deed investor might lend $650,000 on a property with a value of $1,000,000. If the borrower doesn’t perform, the lender (the trust deed investor) can foreclose on the property and, in the vast majority of cases, sell it for more than the loan amount.