Thread: All I'm asking is 6%. Not 15%, not 12%. Just give me 6%

I have a cousin that does the same thing. But usually these houses have a mortgage (or two!) from the bank on 80% or 90%... so you're not actually getting the house at a 60% discount, do you? And if you get the house at 90%, by the time you put your hands on the house it's value (if prices drop) can be worth less than that.

But yea, other than the moral problem of profiting on someone elses misfortune, it's a good way to get a nice return on your money.

I think putting an ad in a local newspaper "need cash? loans against your house" would get you dozens of people calling you. But you probably really need to know what you are doing in order to get into it directly. My cousin pays me the interest but sometimes I get into deals with him in which on top of that, if we get the house, he also pays me part of the profit.

Nope,
I do First lien loans only,
and they are only to experienced investors who know what to do with the property.
I also only allow 6 months, with a 6 month extension on the loan.

so I don't loan to those in an unfortunate situation. only experienced real estate investors.
If the house drops in value, I have a long way to go before it bites me. but I have been bitten a couple times.
there is no 100% risk free anything.

and the thing is, I have more people who want to borrow more money than I have so it keeps my money busy. and I get to be choosey.

Originally Posted by davidil

I have a cousin that does the same thing. But usually these houses have a mortgage (or two!) from the bank on 80% or 90%... so you're not actually getting the house at a 60% discount, do you? And if you get the house at 90%, by the time you put your hands on the house it's value (if prices drop) can be worth less than that.

But yea, other than the moral problem of profiting on someone elses misfortune, it's a good way to get a nice return on your money.

I think putting an ad in a local newspaper "need cash? loans against your house" would get you dozens of people calling you. But you probably really need to know what you are doing in order to get into it directly. My cousin pays me the interest but sometimes I get into deals with him in which on top of that, if we get the house, he also pays me part of the profit.

Originally Posted by zendolphin

and the thing is, I have more people who want to borrow more money than I have so it keeps my money busy. and I get to be choosey.

Which market are you in (geography)?

If these guys are experienced investors why don't they put a mortgage on the property instead of borrowing at 15%?

Which market are you in (geography)?

I lend in Texas, Utah, Idaho, Nevada and rarely New Mexico

If these guys are experienced investors why don't they put a mortgage on the property instead of borrowing at 15%?

ok let me give you some scenarios

1. experienced does not mean they have perfect credit, or money.
2. banks don't move fast, I have closed a loan in 24 hrs
3. if you have more than 4 loans with a bank, its hard to get any more
4. if you going to rehab and sell the property, banks dont loan on property until its fixed up
5. if banks will let you buy rehabbed property, (some will) they often wont give you any money to fix it.

so here is a deal recently

THE DEAL
woman wanted to sell house, she had cancer, got divorced, and was getting foreclosed on. she was stressed to the max

investor came in, offered her 350K for the house knowing he would have to put in 150K to fix it up.
house was 5K sq-ft in a area of town that typically fetches 200-250 a sq-ft all day long. even in this market

a different buyer offered her 350k on the house, but my investor offered her 15K in cash to her personally. (the 350 would only cover the loans on the property, one to the bank, one to her aunt, one to her dad, no money for her)

she needed to close in 7 days or the foreclosure would take effect, and she would lose the house.
she didn't want to file bankruptcy because she was sick with cancer, and didn't want the additional stress.

so to close the deal my investor had me walk the house. i agreed that it would sell for 1M + and the rehab money still only brought it to just over 50% LTV.

we agreed it would take one year to fix and to sell. (slow market, Fixed in 2 months, 10 months to sell.)

as an example of a deal I would do
loan the 365K as a first lien.
150K into escrow for rehab
total loan 515k before points and fees.

now this is in New Mexico, so max I can loan is 15% Int APR. that kills my points, and a higher int rate.

to fix that I charge 14% (so i have room for late fees,) and 15% of the equity deal.
investor does not like that very much, so we settle on 12% equity.

so the numbers will look something like this.

purchase price 365K
Rehab 150K

Payments to me MO /Yr $4258.33/$46,841

150K escrow. expected it to be drawn down in 2 months.

extra payment of mo/yr $1750/$15750

Total payments for 1 yr $62,591

Sell for 1M dollars
take out costs (6% RE fee, taxes title ect, total about 12% +/-) or about 120K max, (could be less)

pay my loan at 515K
pay Int for 1 yr of $62,591
Total payout $697,591

Net profit $302,409

I take my 12% 36,289.08

his take home profit is 266,119.92

my take home profit is 98,880.08


my investment is $515,000
My risk is secured by a 1M dollar home.
my return is 98K
or about 19.2% if everything works out.

if it does not work out, I take the house and I sell it. at a discount say 900K
I end up with about 260K for my 500K investment. so that's ok,


now why would someone pay those rates?

this investor got divorced. bad credit, doesn't have a "regular job" is an entrepreneur, and banks don't like any of that.
so just because he is out of the box, but very experienced doesn't mean he should be disqualified from making an extra 250K on this deal. it should take him 2 months, to finish the house out, (he is hiring a contractor, one of my conditions) and then sit around until it sells. so he can stay busy, and do other deals.

He cant afford to pay the interest only on the loan every month, and since im into the house around 50% I can roll some of the money into it. but I require he pays something every month. I like the monthly contact with borrower. so say 1K a month.
the extra money gets rolled and charged at the regular rates.

now what If I don't have all that money avail? well I call a couple of my friends and offer them a slice. so I get 200K from a friend of mine who has been doing this for years on and off, with me, and he is a doctor. doesn't have time, or knowledge about lending so leaves it to me. as a result he gets a straight 14% as a partial of the loan. all the points are mine, for dealing with it.

so this deal has gone from way beyond this guys ability, and no banks ability, to being able to be done, into the title company, and closed in 4 days.

the winners are...

1. The woman. she gets to pay off her aunt, and her father, oh, and the bank. she also gets 15,000 in cash where she had zero before. also no stress

2. the investor. borrows at expensive rates, BUT, didn't have to muck around with a bank, and the bank would have said no for a dozen reasons. including, bad credit, (less than 720) not enough income, no additional equity, not an owner occupied home, already has multiple loans on the books, not an income producing property, not enough money to put down (20% these days), yet still can plan on making 250K extra this year, as a result of probably less than 100 hrs of work.

3. the lender, me (gets a sold 19% ROI, with the upside of more is the investor defaults. ) gets a piece of the upside to compensate for the lower Int Rate in New Mexico. offsets risk with good LTV in property

4. the lenders investor, gets a 14% ROI at just 200K into the deal, gets to put in a smaller amount of money, gets to have a hands off transaction, with the lender taking part of the risk, and all of the work.


this is why I like hard money lending

Now, how does it compare to the other aspects of real estate?

development. there is just the dirt to start. if things go wrong, its dirt, or a partially finished building. to much risk for me. I have had developer friends, and they told me it was the fastest way to go broke. but others have done well. just not my thing

SFR Rehabs lots of work if you ask me, and lending brings in almost as much as a rehab would in most cases (not this case, this deal is pretty sweet for the rehabber) to much work to fix and sell.

multifam. I can usually get a 10-15% Cap rate, and a Higher IRR on multifamily. those are great, buy you have to find a great deal, get the loan in place, get the equity money in place, get the management in place, and it takes a lot of brain damage to get one done at a good price.

house rentals....
well its a usually a better return than rentals, with less management. I outsource most of my loan servicing to a private company that charges me $12 a month per loan to manage, collect and send out those 1099 INT forms at the end of the year. that means no toilets and no Tenets yah!

Commercial property, ... See multifam.

Lending if done right is great, but you will need some good solid information, and expertise for doing it right. all that is obtainable via a couple different classes out there.

licenses, if you do under 12 loans a year in Idaho, you don't need one. each state is different and you will have to check with your state, or any state you lend in.

there is Usury laws out there too, and that's why only the 14% in New Mexico. max is 15% APR, that includes a calculation for points fees ect, for the 1st year. Utah, unlimited if to a business, I think 10% on a property. so I only lend to businesses that own the property. Texas 18%, you get the point.

hope that helps.

Thanks, that's very helpful. Can you give us an idea of how often these loans blow up and how often you had to take a loss?

As a Real Estate investor in GA, I can say that what Zen is doing is definitely worthwhile. At some point after I have done enough deals, I actually want to be a HML.

Originally Posted by 365

Thanks, that's very helpful. Can you give us an idea of how often these loans blow up and how often you had to take a loss?

loans do blow up, and I do have to foreclose

how often, depends, more went bad in 2008/2009 as the market shifted quickly.

prior to that I had 1 in 15 or less actually go to foreclosure. depending
the reason was that the market was moving fast easy to sell properties.

I don't mind one blowing up, since often times a foreclosure usually means i can sometimes double my profit by dealing with the problem.

losing money has only occurred rarely. the goal here is to do a loan at such a Low LTV that I can expect to get my money, my interest, and my profit out of them. but it happened, when the house was robbed of all its copper, and all the materials the were purchased for the rehab was stolen. when the removed the wiring and pluming, by the time we got the house back, in shape and sold, we lost around 15K on a 180K investment. so it didn't sting to bad, considering.

but your mileage may vary.

I am an experienced real estate guy, so I have been able to mitigate the risk on alot of these loans, just by knowing what to do.

You lost due to theft? Don't you have insurance on these houses your rehabbing? What happens if it burns down?

Originally Posted by garyfritz

You lost due to theft? Don't you have insurance on these houses your rehabbing? What happens if it burns down?

insurance on all the properties.

it was a rare incidnet.
made a loan, investor bought the materials and stored them on site.
people broke in, stole all the materials.
since it was the investors who lost it was his problem. his tools, his materials ect.
except when he lost all that he quit working on the house. it sat open for a month, copper removed.
(by the subcontractors) investor stopped paying. we foreclosed. now it was our prob. we didnt realize the extent of the problem until we foreclosed.

we fixed and sold.

it was when I didn't know not to give the investor alot of money up front. now they go buy some materials, and get reimbursed after the work is done. we do it in stages.
he does 10K in work with 5k in materials. we check it out, then disperse 10K , he dos another 10K in work, then we disburse again. it depends but that was the lesson i learned. I got that one early on. way back when.

ya get smarter after each one.

Thanks for the post, good stuff. But how can someone do something like this in the US when he is living somewhere else? :-)

Originally Posted by zendolphin

insurance on all the properties.

it was a rare incidnet.
made a loan, investor bought the materials and stored them on site.
people broke in, stole all the materials.
since it was the investors who lost it was his problem. his tools, his materials ect.
except when he lost all that he quit working on the house. it sat open for a month, copper removed.
(by the subcontractors) investor stopped paying. we foreclosed. now it was our prob. we didnt realize the extent of the problem until we foreclosed.

we fixed and sold.

it was when I didn't know not to give the investor alot of money up front. now they go buy some materials, and get reimbursed after the work is done. we do it in stages.
he does 10K in work with 5k in materials. we check it out, then disperse 10K , he dos another 10K in work, then we disburse again. it depends but that was the lesson i learned. I got that one early on. way back when.

ya get smarter after each one.

Just a note that there are other secured debts you can loan on as well. Several years ago I did similar method with mobile homes. I know it not the most glamorous, but it was great money and a very good learning experience. I did not have the money to do regualr homes and it was the same concept. There were lots of mobiles for sale, but no bank would lend on them. I contacted the sellers, took an option to sell the place for them ($20). Then I would advertise in Penny Saver to own for $200/month. So I would get buyers who would pay me $500 down and $200/mo for 3-5 years. I usually could by these for about $2k. My very first deal I pulled in over $5000 from my initial $1200 buy in about three years. People would stay for a year or so and then move on. Note, because I was 'selling' they usually fixed the places up themsleves. I would never rent. I was lien holder on the loans and that was all. It was then I learned it is nicer to have people going to work because they owe you money!
Just encouraging anyone who likes this model to think outside the box a bit. It can be done.

After reading The Millionaire Fastlane I have understood the importance of financial markets and started to learn what I can about it. To all of you who are asking about books to read or where to find information. By far the most useful guide into the world of finance I have found to be on iTunes U. There is just something cool about learning from the top professors in the world about the subject. I am currently watching the courses of Financial Markets and Financial Theory from Yale University. Definitely a must for all beginners. Both courses have about 26 1h lectures with video from the classroom and a link on the side for all the study material, problem sets etc.

Hope this will help some of you guys to the right path and information.

Oliver

WOW

This is great stuff, and I just found out that you can listen to these two courses for free online, no iTunes or anything.

Courses — Open Yale Courses

There are actually other courses there I'm going to listen to.

Update about my original post:

So I now have an investment banker who I work with, it's a small firm that manages my account. This is a 100% tailor made service, I'm spending on the phone about 2-3 hours with this guy EACH WEEK, talking strategy and what he will be buying for me. We decided to go into the market in small chunks of $150k a month over the next year or two, to average the purchasing prices and stay on top of the changes in the market. You need a minimum of $0.5m to work with these guys and they are based in Berlin so it's all regulated by German law.

What I'm invested in are structured products that give 8%-10%, from many different issuers, the only risk is a bank default and these papers are first in the line of creditors. They are high yield because they are for 10-15 years and you can only buy them in large chunks. There is also a "risk" of an early call, which to me isn't a risk at all. Then I'm invested in hybrid bonds from banks and insurance companies (read about them online) which give 5%-7% due to their attractive prices at the moment. Then some REITs and finally safer bonds of large multinational corporations. I get leverage from the bank up to $2 for every $1 that I have for a very low rate, less than 2%, because interest rates are so low, so when you factor this in, the total yield is more than 10% a year. The portfolio is diversified with different issuers, geographical locations and currencies. I'm going to put 60% of my savings in the portfolio and 40% in real estate, investing at the developer level.

Any question - let me know.

I'm not sure I'd put my money in a bank in Panama... but maybe. I know there are some Russian banks that do this too... But are you talking USD or local currency? who knows, maybe Russian banks are actually safer than American banks at the moment. You say there are "many" ways, would you like to share some more?

Originally Posted by GlobalWealth

On the original topic, there are very safe and secure ways to get 6%. I have a connection with a Panama credit union that pays 8% on 12 month CD's.

Originally Posted by davidil;176390 on (September 8th 2011)

I should have bought Apple shares when I had a chance... idiot.... now it's too late!"

When you said that Apple shares were $384. Today they are selling at $502. That's a profit of $118 per share ($502 - $384). $118/$384 = .307 x 100 = 30.7% which averages out to 6.14% per month or 73% annualised. You could set a trailing 10% stop loss at this point (because this new uptrend has been going quite strong since then) and take a fantastic (unbelievable to most) return.

Stock:Apple (AAPL)/WikiChart

Just saying...

This is an interesting area to look at for a biz op. Perhaps an online FX exchange, something like "Second Market" to bring more efficiency to FX spreads to consumers.

Originally Posted by pro

Forex is liquid too but banks charge around a 2.5% spread per trade you put on.

So if you want to convert between US$ and EUR$ they'll take 2.5% of the transaction, giving you a shitty exchange rate -- consumers should be LIVID. I'm talking about banks -- not forex trading firms that offer some of the most competitive prices out there.

When I converted ~ $500,000 worth of currency, I lost a real $12,500 to a major who took a virtually "risk-free" margin on the bid/ask spread.

1.5%-1% regardless of the number of trades?

Also, is the earnings from the spread between the short term and long term bonds compounded daily, monthly, or annually? Are your expenses compounded daily, monthly, or annually?