There has been much debate about where to put excess cash and where to earn a decent return…I thought I would post about some of my investments…
I invest in privately held reit that yields about %8.5 annually…I have had x amount of dollars in there for about 16 months and there has been zero volatility or share price movement…I basically dont look for it to move at all and just expect the dividend…The only drawback is the holding period which Im past at this point…I dont bet the farm on this type of investment but I do put a decent piece of change into it…
I also do Hard Money lending and I hold private mortgages on NOO properties…Yields can be anywhere from %10-%20 annually…I typically do short term collateralized funding that is no longer than 6 months to 1 year…I put a decent piece of change into this investment and expect to compound the interest and keep reinvesting my gains on new mortgages…
To add to it I have a few multi family properties that are run by property managers…After considering my money out of pocket and my ROI is about %15-%25 annually but the aggravation isnt worth it to me. …And that %15-%25 ROI is in jeopardy if a boiler or the roof goes…But its been OK but I wouldnt put the farm into it…Its an illiquid investment unlike the others…I have a very small amount of capital set aside for this investment
I bankroll people in business as well…Business loans are very profitable if you structure the note and the deal correctly…If you dont know what you are doing you can lose also…Thankfully this is the area I have the greatest understanding and my greatest ROI…North of %25 annually is the ROI…
I find these times unprecedented to invest in certain areas…There are many opps to make income whether it be from Real Estate or lending…I left out a significant portion of my investments income and other due to the private nature…If you notice I dont bet the farm on any one area of investing…I currently own no stocks,no bond funds,no closed end funds,no mutual funds…
I posted this to start a thread on income investing and hopefully others will share…
Rookie thanks for this post. I understand your ROI’s and concerns with the multi-fams, but the rest is a bit foreign to me. Because the REIT is private, does that mean I couldn’t invest in it? Also to get into a hard money lending business, you need a large amount of cash right? Like 7 figures to really get started?
John,
Anyone can invest in private reits…Naturally do your research on the particular reit and find out if you are comfortable with their method and technique of investing…Simply google Private Reits and you have many options…I invest in the Apple Reit with David Lerner in NY…I do alot of business with them and I like the Reit…There are others,many others…So take your time and find out all the details before investing…
Hard Money/Mortgages takes a bit more capital…I wouldnt say you need 7 figures but I would say if you want to make a good amount the more you have the more you make etc…But I dont feel you need more than 50k to get your feet wet…I do play big in this area but all the same Ive seen some well protected/low LTV loans come up for 25k-50k…Unlike many HML I like a portfolio of smaller loans with higher collateral…Point being I wouldnt make $1 million HML with 2.5 mill collateral…I dont want to tie up too much capital in one loan…The probability of loans being paid off before their said term is high in this industry…So I like to have a portfolio of smaller loans that are being rotated…
If I can answer anymore questions let me know…I’d be glad to help…
Thanks one more question. What do you think about municipal bonds? The no income tax really sounds attractive to me, both financially and politically, but i’m sure there are plenty of caveats.
John in NC,
I actually prefer muni bond funds before buying individual municipal bonds…I never bought them and would look toward a highly rated municipal bond fund…If you are talking General Obligation Bonds just know what you should expect…This is why I would choose to invest in muni bond funds,the fund managers do extensive research…And your basically liquid if you choose to sell…Something to consider…
FurnishedOwner,
Yes that is exactly the reason…Lending to owner occuppied properties is very different than lending to a NOO…Homestead laws,all these new regulations are being passed for owner occuppied loans/properties…
Thank you for mentioning different investment vehicles you use, especially the private REITs. I’m familiar with public REITs so I’m wondering if you can point to more resources on that. Pros/cons, ways to evaluate and how they are different from public REITs.
I regularly invest in equities and options, as I have professional background in that. While 2009 was a great year for investing in equities, I think that 2010 is more about capital preservation. I don’t see a lot of opportunities at the moment. Perhaps, there would be more later in the year, when/if there is a decline.
I’d stay away from GO Muni funds, primarily due to 1) credit risk (no backed by any particular asset and most state govt. are in poor shape 2) interest rate risk (I suspect interest rate will eventually start to rise at EY2010 or early 2011).
My primary reason for thinking about RE is for diversification and leverage.
badmash 007,
I have to agree about 2009 and 2010…I ended the year up very nicely (actually my best year ever) and walked away before the chop set in…The difference between a private reit and public reit is volatility ofcouse…Public trades and private doesnt…Reits as you know come in all shapes and sizes…Pros/cons are liquidity/volatility(public) vs illiquid/zero volatility (private)…Holding periods tend to be associated with private reits and you obviously have to have faith in the people that run the reit and their methods of investing…I would say do alot of research on the reits that interest you…I like private reits because I want to eliminate the volatility out of my portfolio til we either get a huge pullback (in the equity markets) and I re-enter some longs or we get a wipe out again and I can short some puts and increase my long side volatility in a huge way…I think we are in for a tug of war but I dont know…I took my profits from that incredible bounce and invested it…
As for buying munis or not John in NC mentioned it…I wouldnt buy any bonds,bond funds here because we are turning the corner on interest rate increases and the bond market will surely be affected…I can only give my opinion on what * I * do and let others make up their own mind…But I do agree…I wouldnt touch bonds here…
I find this topic interesting, I would like to learn more about the money loaning business.
Can you recomend any good books or web sites on the subject?
I like the idea of putting money to work for me . I have already started doing so on a very small level. A family friend has a automotive shop and I give him short term loans to buy cars fix them and sell them. I would like to start providing loans to more people but I need to know more first. I do this with a hand shake as of now, but only to one person that I’ve known my whole life . I would like to go bigger and learn the rite way to do it.
Im only working with about 20k that I feel comfortable putting out there. Once I get that all loaned out , do you think its possbile to go bigger using other people’s money? borrow at say 8% . lend at 15%-20%?
Dennis,
I suggest you IM fdjake and ask him how to properly protect yourself with these car deals…He is more experienced than I with car sales/deals…I dont like the handshake deals/I never do them…I only lend when I have collateral…Give someone the option to not payback and they will give you every story under the sun…I never do anything without my attorneys…And be careful of going over the state Usury laws…Its a serious crime and the last thing you want to do is break any laws…Especially if someone doesnt pay you and you start worrying if your rates were too high…Promissary notes are worthless…You need collateral to lend to someone…Otherwise dont do it…
If you do a search I did post a few good books on the lending business but i would wait until you are working with a little more money…$20k is pretty tough to start doing mortgages with to be honest…You may want to speak with fdjake about the flipping of cars…IMO you can get a better return on that $20k doing that than doing mortgages…As far as lending out money that you have borrowed that is tough…In the mortgage industry you need to be licensed to lend out other peoples money…When its your own its a non issue…I highly suggest you interview some local attorneys…Doing loans without collateral and contracts is recipe for disaster…I just did a small deal (not a mortgage) for 45k (%15)over 2 years and I had my attorney draw up a contract for the entire deal…Even though I have the collateral etc…NEVER DO ANYTHING WITHOUT AN ATTORNEY…
Your advice about private lending is on the money. It reminded me of an article I recently read on NYTimes. Note, that it is no different than Hard Money Lending, except the collateral is other than the property.
Back in 2006-2008 when just being able to fog a mirror and get a loan I went into the downpayment assistance business. The best ROI ever. I would lend money on OO or NOO and 100% secured at 15% interest and a $300 application fee. Waiting for the mortgage crisis to end to get back into this field.
The basic concept was the buyer needs 10K down on a 100K home with equity over 15K or more generally. Contract is created where the seller will mark up the cost of the home 11,500. The seller, buyer and title company sign off on my contract as a third party. One closing day I wire the downpayment to title company. Title company does close and gets funded same day and from sellers profits they wire me back my downpayment plus 15% interest. Money is never at risk. This was done on NO SEASONING LOANS which have vanished when there were so many easy loan programs for investors. Imagine turning 100K a week out in loans like this at 15% interest plus the $300 application fee. My turn around time was 48hrs to complete prior to closing. Best type of private money investing I could think of.
I had looked into some REITS in past, but always worried about the scams as well out there.
One investment I like now is longterm life insurance policy which can be colleratized of course for retirement income. Many life insurance companies have lowered the dividends to much less than what you put in yearly. However Minnisota Life only deals with life insurance and they have a product that runs just off the S&P. Even though market is weak now, it is a great product. Dividend is based on how market performs. If S&P is up 10% at end of year, I make 10% that year, with a 16% CAP. Upside is market is down 10%, I lose nothing but have no gains. It is a great product. We know over a 10yr period we will have more ups then down.
Plus because of my age and health, I was able to secure a 1mil policy at a very reasonable rate. In fact the 1mil is three quarters the cost of my 500K with Hartford I signed 5 yrs ago.
Yes I believe in Insurance as a backup. Great was to invest longterm and have no captial gains tax when pulling money out at 60. Invest full in ROTH IRAs to…
badmash 007,
Very good article…I will say that Im uncomfortable with the risk of lending to various different businesses like this Hartsko guy is doing…I dont think its risky if you are well versed in the area of business you plan to lend in but to expand outside of that area it gets tricky…This guy is in the loan to own business imho…Nothing wrong with that but thats what I got out of the article…And Im sure he makes a fortune doing it…Collateralized Lending imo is a business model that is here to stay for many years…Even if the banks loosen up their lending criteria it will be super strict compared to the liar loan and business lines of credit days…Those days will take a long time to come back but here is my thinking on the matter…This guy like me is starting a business and forming a relationship with a list of repeat clients…These are people that will continue to use your services when the banks start to lend more…They will enjoy the easiness of your lending methods but at the same time you can bet this guy has a couple of very good attorneys to form these highly binding,highly collateralized contracts…Im sure he is employing surrender of rights contracts,and numerous signed and notarized letters from the borrower admitting default in advance so when he has to go the Supreme Court and fight to take control of assets he presents the letter and surrender of rights and he will mostg certainly get a summary judgement…Long winded I know…Ive been around too many attorneys in my day…Just protect yourself contractually and get collateral and you will be fine…
Very good insight. Thank you for sharing! I think that the one thing missing in the article is how he’s able to move the merchandise/assets if he gets stuck with it. Real estate is straightforward, but someone gets stuck with clothing, how do they move it? Even before that, how do they even value that the collateral is worth a certain amount? I guess that it is where knowledge of that particular business domain comes into play. Perhaps, like pawn shops, he has industry contacts who he consults with to evaluate the collateral’s worth and how to get rid of it if he acquires it.
badmash 007,
Yeah…I agree…I was taken back to read the guy was trying to sell sandals that were leftover from a deal…In my mind I have a list of people that I would deal with to unload that garbage but Im more curious what methods this group uses and if they secure the real estate that houses these companies or not…Im not interested in doing that kind of lending though…I have areas of certain franchises that I lend on and I understand the business very well…I have over 20 years invested in the company so when I bankroll a guy Im corfortable which ever way the deal goes…You have to go into every deal and prepare every deal like you are NOT going to get paid back…Every deal has to be structured in such a way that you naturally heavily favored if the deal falls apart…You never want to give the option of the borrower walking away pain free if he/she chooses to bail on the project or default on the loan…This way you have their cu$hion to sit on after they bail/default on you…And you compound this by having everything in writing by attorneys…
I have some questions about the lending to businesses. Why are the returns so high? Is it very short term notes? What business can afford to pay 25% for operating money?( assuming its for operating ) What regulations or other hoops are you having to jump through? From your posts, you are apparently doing these loans on a collateral basis? If that is so, why can’t these particular businesses go elsewhere to get a better rate?
dsbrown,
Rates+fees+points…Many businesses can afford short term funding to be high…They may have a huge order waiting to be filled to make their year and not have the funds to buy more merchandise…So if 100k is going to make them $500k whats the big deal to pay high interest…And why cant they go to banks,very obvious in the current environment…There is very little ease for a business owner to find financing…Its just very difficult and alot easier dealing with a collateralized lender…Also consider business loans for the most part dont exist at all…Funding is all but shut down…Private money is the way to go for a long time in this country…Even when things loosen up you will have to be a spectacular borrower to get investment money or business loans…I currently have a piece of a corp who I know for 20+ years has a guaranteed rent roll every year of X amount…They wanted to borrow X amount for a said period of time…Collateral is property and business UCC (lien)…I will do these deals all day long if I was presented with them…
I am not seeing clearly here why this is so high. Could you elaborate on the risks? Are these high risk businesses? If the loan is fully colateralized, and short term, with solid businesses with orders to fill, I would give them money considerably cheaper. And is that high rate on the portfolio over time or on each individual loan?
A side question. To do this type of borrowing, you must use a pool of cash that goes out and comes back in. What vehicle do you hold the funds in that aren’t being used?
Also, Are there regulations that you have to adhere to if you do this kind of lending?
Business loans are generally higher especially when there isnt cash to use as collateral as ridiculous as that sounds…Asset based collateralized lending is going fetch higher rates…If these companies had money they would simply use their own or go to a big bank and deposit their money in CD at %2 and the bank would match every dollar in a loan to build credit for the corp…Banks are not lending…Business lines of credit are extremely tough to get…So if a business gets an order on the fly you think they want to risk waiting weeks,maybe months to get funding?..They rather go privately…And yes…Whenever you are lending you must make sure your rates do not go over the state Usury rates/laws…Very serious offense…
I keep the funds in a typical sweep account…You must have an account that is easy to wire funds out of…Some typical banks like the one by me are a pain in the neck to wire funds in and out of…
Risk is simple…default…I know the loans are collateralized but in the end all we want is the veil of a threat to take possession of the collateral…I dont ever want to take the actual assets…I just want my ROI and be on my way…Any type of business loan is risky…
As for having a return of x% on the entire portfolio that is the name of the game…Median average yield…If I can get x here and y there…And have a median of t Im happy…Compounding interest is how you want to play and circulation of funds in well protected over collateralized deals…
It reminded me of an article I recently read on NYTimes. Note, that it is no different than Hard Money Lending, except the collateral is other than the property.