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

[arpeggiomeister]

You don't have to be a full AI. I'm not sure how much $$ you have to have to qualify -- probably depends on your broker. But even stodgy old Fidelity lets me sell naked puts -- in an IRA no less!As long as you have the $$ in the account to buy the stock if it drops to your strike price, it's not really "naked." Don't know about Scottrade but most brokers should allow that. You just have to get approved for options trading and option selling. For most brokers I think that just involves signing forms that say "I'm a big boy and understand what I'm geting into."

Thanks for that. I remember reading that naked puts were reserved for more experienced investors, but the book that I read that from was written in 1996. A lot has changed since than.

I would just like to say that you guys (and gals) rock!!!! I have learned more in the past 2 days on this forum than I have in a long time. This sounds like an excellent source of cash flow.

 

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[arpeggiomeister]

I like these ideas a lot because you have a lot more control. In the case of peer to peer lending you have a contract and the person is legally obligated to pay you.

If you have the money you can create similar deals in real estate or business. I will use a hypothetical example. Earlier I mentioned a duplex available for $62,900. If you purchased this building you could then owner finance it to another investor with less means. If you turned and sold this property for $70,000 you make a 10 percent gain up front, 6% apr on a 30 year mortgage (6% is the legal limit in Maine for person to person lending). This leaves plenty of room for cash flow for the buyer, and has tax advantages for you. By owner financing you can spread the capital gains tax out over 30 years. At this point it becomes negligible

The buyer is responsible for all maintenance/management and if the building ever went into foreclosure you would get to keep all of the payments free and clear and just sell it again.

You may even be able to do this with borrowed money but you need to be careful because banks like to control everything and are not typically open to creative financing.

Education is paramount, no matter what you choose to do. Know the people you are getting involved with. Have a good mentor you can turn to for advice. Have a good attorney, CPA, and bookkeeper. Your team can make or break you so choose wisely.

I have made an art form out of choosing unwisely, but I would like to think that I have been learning valuable lessons from my mistakes.

 

[davidil]

Hi,

I finally found what I was looking for. I had a meeting today with a representative of an investment bank, it's someone that my family knows for many years so it is totally legit. They offer structured products that banks issue specifically for them and their clients, normally each product is $5m or more but as a client you can buy into the products for as little as $100,000. Many of the products are 100% capital protected, and the papers are issued and guaranteed by banks like ING or RBS (which is 85% owned by the British government) and Morgan Stanley. What you can lose is only the interest, which is between 8% and 11%.

An example for a product is that you are paid 10% interest, calculated daily, on each day that the spread between the 30Y Euro Bond minus 10Y Euro bond is POSITIVE. So on each day in which the interest rate that a 30 years bond pays is higher than the rate that a 10 years bond pays - you are paid the interest (10% a year). In the last 10 years this was the case in 95% of the time.... so it's pretty solid. Again - if this doesn't happen - you are simply not paid the interest - but your capital is still protected! There is only a small fee that goes to the bank where you keep the money (0.02% of the account, per year) and a 1.5% fee that goes to the investment bank, which manages the money in your own account. This paper is for 15 years but there are others for 8 years where the interest that you are paid is lower. This product is callable so the bank may cancel it in a year or two, but then there will be other products... there are many different products in the same style, with different horizon, in different currencies, etc, so I'm going to spread my savings on at least 10 of these.

Anyway, I think the "secret" is to find a good investment bank that has access to these "secret" products that normally only the filthy rich have access to... These guys are going to build for me a capital protected (!!!) portfolio that will make me at least 8%-9% a year. If I add a little risk, I can get to 15%.

I'm also going into real estate development, as an investor, in projects that can double the investment in two years. I'm going in at the investor level (at the top), as the person who puts down the money to buy the land on which we will build properties, together with the developer, and we are splitting the profit 75% (to me) 25% to the developer. The developer goes in with 10% of the money, I'll put the rest. The deal I'm working on now is a lot in Williamsburg, 3 minutes walk from a metro station that has an L train, you can build on it 10 or 12 apartments at the cost of $400 per square feet and the selling price in the area is right now is at least $650... about 60% of the money for the project comes from the bank.

Anyway, I hope this helps someone. Thanks for the support.

 

[JEdwards]

Congrats....

 

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[theBiz]

Im not sure how long it takes to foreclose but why on earth anybody liquid with cash on hand right now are not being hard money lenders is beyond me.

My buddy just lent out cash at 30% LTV on someones home which is completely paid off.... if he does not pay the loan... he takes the house.

Also hes getting 15%.... all lawyer fees paid for upfront by borrower...

Obviously your money gets a bit tied up and if you have to foreclose it takes time but if someone does not pay it seems you can make alot of money by taking their secured asset.

 

[365]

Davidil, I don't mean to bust your dreams but if you think an investment banker's primary goal is to protect your monies, you're a little off the track.

"These guys are going to build for me a capital protected (!!!) portfolio that will make me at least 8%-9% a year. If I add a little risk, I can get to 15%"
You may not see the risk, but I can pretty much guarantee it is there. If there was a risk-free 8% out there, the bank would take it themselves. Any day of the week. And if the regulator didn't permit them for some reason, they would push it to their hedge fund clients (which bring in tens of millions in trading commissions a year).
Think about it this way: someone has to take the other side of your trade. Unless you know exactly what you're doing, how the product is structured and how it will behave in different market environments (interest rate curves) you should be cautious.

Also: why do you try to protect one part of your portfolio and earn 6% while trying to double the rest in two years? I would argue that RE development is pretty high risk (especially if you put in all the money but are not the one with the expertise).

 

[garyfritz]

theBiz, that's a great idea. I have some money that would be better spent that way than the way I'm using it now. But I know nothing about hard-money lending. Do you know of any pointers for someone to get into it?

My now-former wife and I actually have some money lent out this way already, to people she happened to know who needed a business loan. But I don't know how to find borrowers, what it takes to set it up properly, what the typical parameters are, etc. Loaning at 30% LTV is pretty unusually low, isn't it? Especially for 15%?

 

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[davidil]

The risk is that the bank will default but the day a bank like RBS or ING will default will be the end of the world and my money is anyway in a bank that can default too, so the risk there is the same.

These products are for 15-20 years so I have the risk of inflation and the USD or whichever currency the paper is in will depreciate and that's another reason for the higher interest, they are callable so the bank can cancel at any time (more risk but I don't care so much), and the banks sell them in chunks of $5m-$10m so I guess my bank is one of these "hedge fund clients"...

There is also the risk that I won't be paid the interest but will still have to pay the 0.02% and 1.5% fee.

By the way, I also want to hedge against such "end of the world" scenarios, there are protections that you can buy against it...

Davidil, I don't mean to bust your dreams but if you think an investment banker's primary goal is to protect your monies, you're a little off the track.

"These guys are going to build for me a capital protected (!!!) portfolio that will make me at least 8%-9% a year. If I add a little risk, I can get to 15%"
You may not see the risk, but I can pretty much guarantee it is there. If there was a risk-free 8% out there, the bank would take it themselves. Any day of the week. And if the regulator didn't permit them for some reason, they would push it to their hedge fund clients (which bring in tens of millions in trading commissions a year).
Think about it this way: someone has to take the other side of your trade. Unless you know exactly what you're doing, how the product is structured and how it will behave in different market environments (interest rate curves) you should be cautious.

Also: why do you try to protect one part of your portfolio and earn 6% while trying to double the rest in two years? I would argue that RE development is pretty high risk (especially if you put in all the money but are not the one with the expertise).

 

[davidil]

Hey, what does "30% LTV" mean? You're saying he's getting 15% so what is this 30%?

I have $150k with my cousin who does just that, and he pays me 12%.

Im not sure how long it takes to foreclose but why on earth anybody liquid with cash on hand right now are not being hard money lenders is beyond me.

My buddy just lent out cash at 30% LTV on someones home which is completely paid off.... if he does not pay the loan... he takes the house.

Also hes getting 15%.... all lawyer fees paid for upfront by borrower...

Obviously your money gets a bit tied up and if you have to foreclose it takes time but if someone does not pay it seems you can make alot of money by taking their secured asset.

 

[Mr.Marnier]

Hey, what does "30% LTV" mean? You're saying he's getting 15% so what is this 30%?

Loan to value is how much was borrowed against the value of the asset / product purchased,

For example you take $30000 loan against a house worth $100000, $30000 is 30% of $100000 therefore your loan to value or "LTV" in this scenario is 30%.

 

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[davidil]

Got it, thanks!

 

[davidil]

About this product above, I think these are the type of products that "institutions" buy and very large clients. The structured products that "we" get are junk products that are repackaged 5 times and passes from one bank to the other and every step along the way take a chunk for himself. So by the time you get to buy the product, you're getting it at a much lower value. Here I'm more or less buying the product directly from the issuing bank (via an agent). I don't think 8%-10% is "too much". This makes sense. These banks take my money and lend it out five or seven times at about the same interest or higher to someone else...

There are also "2nd rate" bonds (meaning if the bank defaults, you are 2nd in line to be paid after the preferred bonds) that pay 8% or even 10% from banks like Deutsche Bank and Credit Agricole. If these banks will default it will be the end of the world anyway. The day Deutsche Bank default, it won't matter how much money you have, it will be a question of how much food you stored.

No? Am I totally off here? How would Deutsche Bank ever going to default? World War III only...

 

[pro]

davidil - I think that 1.5% fee is potentially risky. Is that calculated for each trade that is put on daily?
Also, is this a fixed investment for 10-15 years? If you want to sell this investment how liquid is it?

You're betting on interest rate spreads. I think the transaction fees + bid/ask spreads might kill you.

 

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[davidil]

It's liquid, they trade... The fee is paid over the entire account per year (1.5% - 1% depending on how much money there is in the account) if these papers are making 8%-10%, I don't see how 1.5% is going to be a problem.

 

[pro]

It's liquid, they trade... The fee is paid over the entire account per year (1.5% - 1% depending on how much money there is in the account) if these papers are making 8%-10%, I don't see how 1.5% is going to be a problem.

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?

 

[garyfritz]

The risk is that the bank will default but the day a bank like RBS or ING will default will be the end of the world...
How would Deutsche Bank ever going to default? World War III only...

Have you been watching the Greek crisis? That is just the first act in what is likely to be a very ugly financial reckoning for European banks and the rest of the world. Europe is spinning up a financial implosion that is likely to make the US 2008 crisis look like a minor kerfuffle.

Look at the DB, RBS, and ING share prices -- down over 30% since July. They are not in good shape. If (when?) the fertilizer hits the ventilator in Greece / Italy / Spain / Portugal / Ireland / etc, some of those banks are very likely to implode.

I wouldn't lock up my money there. Certainly not for 8-9%.

 

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[davidil]

I agree and I follow the news, but the German gov is not going to let DB default... it's not an investment bank like LB. If DB defaults it doesn't matter how much money you have, we will be back in the stone age.

The risk that DB will default is the same as BOA defaulting or the US Gov defaulting... it CAN happen, but the chance that I will die tomorrow from a heart attack is probably 100000 times higher.

What I think is going to happen in Europe is that Greece and maybe other countries will have to leave the Euro zone and get back a national currency... that would put an end to all these problems.

Have you been watching the Greek crisis? That is just the first act in what is likely to be a very ugly financial reckoning for European banks and the rest of the world. Europe is spinning up a financial implosion that is likely to make the US 2008 crisis look like a minor kerfuffle.

Look at the DB, RBS, and ING share prices -- down over 30% since July. They are not in good shape. If (when?) the fertilizer hits the ventilator in Greece / Italy / Spain / Portugal / Ireland / etc, some of those banks are very likely to implode.

I wouldn't lock up my money there. Certainly not for 8-9%.

 

[davidil]

You didn't understand the product, I'm sorry maybe I didn't explain it clearly.

The earnings are 10% a year or lets say 10%/365 per day (0.027%) I get paid (0.027%) on each day in which at 12 PM GMT the spread between 30Y and 10Y bond is positive. If it's above 0, I get paid for that day the 0.027% interest. In the last 10 years this was the case in 95% of the days. I'm paid the interest quarterly into my account.

I don't pay for buying or selling the paper. I just pay the 1%-1.5% fee a year, on the total amount that they manage for me. They don't charge me on the trade, so yes, regardless of the numbers of trades.

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

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?

 

[davidil]

Here is a nice article I found about structured products, it explains what they are and how they work:

Structured products: Is this an offer you can't refuse? - Spend & Save , Money - The Independent

 

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[DeletedUser2]

Im not sure how long it takes to foreclose but why on earth anybody liquid with cash on hand right now are not being hard money lenders is beyond me.

My buddy just lent out cash at 30% LTV on someones home which is completely paid off.... if he does not pay the loan... he takes the house.

Also hes getting 15%.... all lawyer fees paid for upfront by borrower...

Obviously your money gets a bit tied up and if you have to foreclose it takes time but if someone does not pay it seems you can make alot of money by taking their secured asset.

I do hard money lending. and I love it! its worth learning about. If the loan pays, then I get 15-18% plust 5-10 points. and if it doesnt I get a house at 60% LTV and make even more money.

 

[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.

 

[DeletedUser2]

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.

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.

 

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[365]

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%?

 

[DeletedUser2]

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.

 

[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?

 

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[PopEmersen]

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.

 

[DeletedUser2]

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.

 

[garyfritz]

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

 

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[DeletedUser2]

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.

 

[davidil]

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

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.