Private Money Lending

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Re: Private Money Lending

Postby Abe » Fri Dec 21, 2012 7:16 pm

RenoJay wrote:Back in February I started this thread about private money lending. Now that I have some experience, I thought I'd report back for anyone who's looking for fixed income outside of the bond market.

I've made two loans and about to do a third. Here are the basics:

1. First borrower had credit issues from a short sale of a vacation property. He bought a newer home in my area, put down about 40% cash down payment and borrowed the rest from me at 8.5%. Our letter of intent stated he needed to make automated payments via a processor. Thus far, every single payment has arrived a few days before the first of the month. So far so good.

2. Second borrower also bought a newer home with about 40% down payment. Interest rate to me is 9.5%. Same deal as the first borrower (all payments received) except they pay on the 4th instead of the 1st.

3. Third deal is about to close. The home is older, but still is valued at more than the buyer is paying, and they're putting down 33%. They'll pay 10% interest and 3/4 of a point at closing.

In all cases, the broker and I checked their credit, their employment, their taxes and met with them personally. We also checked the homes, got inspections, etc. In each case, the borrowers were "near bankable" meaning they all had good credit but had done a strategic short sale at some point when their homes went deeply underwater.

Overall, I'm quite happy with this new found investment class. Each home has plenty of equity so should I ever need to foreclose I should be able to get my money back. All the payments have arrived like clock work, and I get the chance to meet each borrower, look them in the eye, and let them know that late payments will lead to them losing their home. Unless home values tumble tremendously from here, then I've definitely become a fan of hard money lending for my fixed income portfolio.


RenoJay: I'm glad this is working out for you. I would still recommend that you get the book "Invest In Debt", by Jimmy Napier and the calculator that I mentioned in an earlier post on this thread. I believe that if you got the book and calculator and learned how to use it from the book, it would make you a lot more money than they cost. It did for me. Good luck.
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Re: Private Money Lending

Postby RenoJay » Fri Dec 21, 2012 7:18 pm

Thanks for reminding me. Yes, I'll pick up the book and the calculator.
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Re: Private Money Lending

Postby ryuns » Fri Dec 21, 2012 7:38 pm

Thanks for following up. It's always great to see updates about things like this.

I had a couple thoughts.
First, wow these people must really like home ownership to pay those kind of interest rates. Everything about the loan makes total sense--there are probably a lot of people who made strategic defaults on loans in non-recourse states, but were otherwise current on payments, who now can't get traditional finance. That means a good deal for you, but it doesn't sound like a good deal for them!

Second, do you have any experience with or opinion on other types of "private money lending"? Specifically, I'm thinking of P2P lending, e.g., Lending Club. It doesn't offer anything in the way of collateral, but it does offer much more diversification.
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Re: Private Money Lending

Postby Abe » Fri Dec 21, 2012 7:48 pm

ryuns wrote:Thanks for following up. It's always great to see updates about things like this.

I had a couple thoughts.
First, wow these people must really like home ownership to pay those kind of interest rates. Everything about the loan makes total sense--there are probably a lot of people who made strategic defaults on loans in non-recourse states, but were otherwise current on payments, who now can't get traditional finance. That means a good deal for you, but it doesn't sound like a good deal for them!

Second, do you have any experience with or opinion on other types of "private money lending"? Specifically, I'm thinking of P2P lending, e.g., Lending Club. It doesn't offer anything in the way of collateral, but it does offer much more diversification.


What RenoJay is doing is originating loans. That is okay, but he could be buying already originated owner financed mortgages at discount and get much higher yields and at the same time have lower loan to value ratio. It takes a little studying to learn how to do this but is well worth the effort. At least it was for me.
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Re: Private Money Lending

Postby RenoJay » Fri Dec 21, 2012 10:36 pm

ryuns wrote:Thanks for following up. It's always great to see updates about things like this.

I had a couple thoughts.
First, wow these people must really like home ownership to pay those kind of interest rates. Everything about the loan makes total sense--there are probably a lot of people who made strategic defaults on loans in non-recourse states, but were otherwise current on payments, who now can't get traditional finance. That means a good deal for you, but it doesn't sound like a good deal for them!

Second, do you have any experience with or opinion on other types of "private money lending"? Specifically, I'm thinking of P2P lending, e.g., Lending Club. It doesn't offer anything in the way of collateral, but it does offer much more diversification.


Good questions. In each situation I did, it was people coming to reality. Usually they had been living the high life before and are now moving down to a house that's actually in line with where they should have been all along. The rates are definitely high for them, but part of the deal is that my broker discusses with them how to "get out" of our loans by fixing their credit, etc. over the next year or two so they don't see it as a long term thing. Whether or not they actually do fix their credit remains to be seen.

I do lending with LendingClub and Prosper as well. It's pretty hands off, and the returns have been roughly as advertised. The reason I'm leaning toward this lately is because there's plenty of collateral so I feel comfortable putting $200k into one loan as opposed to $50 in an uncollateralized loan with LendingClub. With the P2P stuff, I've noticed the borrowers pay off the loans pretty quickly which is good if you need the money or bad if you want it to compound. (All you need to do is re-invest it, so it's really not "bad".)
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Re: Private Money Lending

Postby RenoJay » Fri Dec 21, 2012 10:37 pm

What RenoJay is doing is originating loans. That is okay, but he could be buying already originated owner financed mortgages at discount and get much higher yields and at the same time have lower loan to value ratio. It takes a little studying to learn how to do this but is well worth the effort. At least it was for me.[/quote]

Abe, I've heard of this. Can you explain more how it works, how to find good deals, what the risks are, what the realistic yields are, etc.? I saw some book by a guy who claimed he was once homeless and became a billionaire doing this.
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Re: Private Money Lending

Postby HomerJ » Sat Dec 22, 2012 2:18 am

How much does the broker cost?

Does he do these loans with his own money as well?
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Re: Private Money Lending

Postby HomerJ » Sat Dec 22, 2012 2:21 am

RenoJay wrote:
ryuns wrote:Thanks for following up. It's always great to see updates about things like this.

I had a couple thoughts.
First, wow these people must really like home ownership to pay those kind of interest rates. Everything about the loan makes total sense--there are probably a lot of people who made strategic defaults on loans in non-recourse states, but were otherwise current on payments, who now can't get traditional finance. That means a good deal for you, but it doesn't sound like a good deal for them!

Second, do you have any experience with or opinion on other types of "private money lending"? Specifically, I'm thinking of P2P lending, e.g., Lending Club. It doesn't offer anything in the way of collateral, but it does offer much more diversification.


Good questions. In each situation I did, it was people coming to reality. Usually they had been living the high life before and are now moving down to a house that's actually in line with where they should have been all along. The rates are definitely high for them, but part of the deal is that my broker discusses with them how to "get out" of our loans by fixing their credit, etc. over the next year or two so they don't see it as a long term thing. Whether or not they actually do fix their credit remains to be seen.


It would be interesting if you could report back to us in a year or two if they actually fixed their credit, and refinanced with a real bank to pay you off...

I'm amazed they aren't just renting... I can't believe they are willingly paying 9.5% interest with such a huge downpayment.
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Re: Private Money Lending

Postby justus » Sat Dec 22, 2012 3:23 am

There are a lot of gotchas including ensuring that not only that first liens are filed, but that in whatever legal contracts are drawn up, that it is actually your money that is being secured by the first lien. Several of my friends/family members lost significant investments in something very similar to what you're describing. What happened to them is described here

http://www.fbi.gov/sanfrancisco/press-r ... ment-fraud

As it turned out, the property values dropped quickly and there was insufficient equity to pay off the investors. To add insult to injury, the broker had fraudulently misrepresented the investments and they weren't not even actually secured by the first lien.

Good luck to you. Personally, I wouldn't consider it at this point in my life, and if I ever did, I wouldn't invest more than 5% of my portfolio.
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Re: Private Money Lending

Postby Call_Me_Op » Sat Dec 22, 2012 10:36 am

There is a pretty well-defined relationship between risk and return. If you don't mind the risk that ALWAYS goes along with a high return, go ahead.
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Re: Private Money Lending

Postby jimbojones » Sat Dec 22, 2012 11:37 am

I saw an episode of American Greed that somewhat resembles this arrangement. A broker in Hawaii was arranging similar loans until he ran out of eligible borrowers. Instead of telling his investors that there were no more loans to fund, he lied and kept taking investors' money. Instead of funding loans, he now funded his lavish lifestyle. And like any Ponzi scheme, he required new contributions to pay the interest/principal on older investments. Eventually, of course, the scheme derailed and he ended up killing himself. Many investors lost significant sums of money. Here's a link to a related article:

http://www.cnbc.com/id/46796860

Prosecutors say Lull, based in Hawaii, offered investors the opportunity to help distressed homeowners by funding high interest bridge loans. He claimed it would help people pay off debt to boost their credit scores, so they could qualify for an affordable mortgage and provide investors with a high rate of return. However, Lull’s loans became too popular among his investors.


The high risk, high return mantra applies here. Of course, not every broker is a fraudster like Lull was. But there is no free lunch.
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Re: Private Money Lending

Postby Abe » Sat Dec 22, 2012 12:43 pm

RenoJay wrote:
What RenoJay is doing is originating loans. That is okay, but he could be buying already originated owner financed mortgages at discount and get much higher yields and at the same time have lower loan to value ratio. It takes a little studying to learn how to do this but is well worth the effort. At least it was for me.


Abe, I've heard of this. Can you explain more how it works, how to find good deals, what the risks are, what the realistic yields are, etc.? I saw some book by a guy who claimed he was once homeless and became a billionaire doing this.[/quote]

RenoJay: I'll try to answer your questions. This may be lengthy. People occasionally owner finance the sale of their homes (mobile homes, etc.) for various reasons. Not as much now as when interest rates were high. A lot of these sellers will sell these mortgages for a lump sum of cash now rather than wait for a series of payments. You run an ad in the paper or put little signs up on bulletin boards in stores, etc. saying, "I pay cash for mortgages, land contracts, name and phone number". When these people call, you get the information you need and make them an offer. So, if their 10% mortgage has a balance of say $20,000. you may offer them $12,000. Can you see where your yield will be more than 10%? If they accept, they assign the mortgage to you and then you collect the payments. As far as risk, I'll have to say that I have never lost any money doing this, but a lot of risk can be avoided if you know what you are doing. In order to know what you are doing, you need to put in some time studying. The book I told you about earlier, "Invest in Debt" by Jimmy Napier explains how to do this and how to use the calculator to compute yields, etc. He recommends the Texas Instrument BA ll calculator that you can buy at Walmart for less than $30.00. You can order the book here http://www.jimmynapier.com/productlist.php for $24.00. Later, I went to Pensacola, Florida and took Napiers basic paper course. You can order the Basic Paper Course also. It used to be on tape, but I guess it is on CD now. You may not be too impressed with Napier at first because he comes off as sort of a country bumpkin, but he is very knowledgeabe. The book is self published and not necessarly well written but the information is right on. I would not do these through a broker or anyone else. You need to do your own due dilligence. As far as yields, whan I first started, back when interest rates were real high, my average yield was 24%. That sounds unbelievable now, but that is what it was. I would think you should be able to get 12% to 15% yields now. As far as the homeless guy becoming a billionaire in discounted paper, I don't believe that; nevertheless, it is lucrative. Let me say one more time, this has risk. You need to know what you are doing. A lot of the risk can be mitigated, if you know what you are doing.
In the last few years, I have been originating loans at 14% through a government program called "The Officer Next Door Program". This is a little simpler than discounting paper. If you want information on that, let me know. All of these things are riskier than Boglehead type investments. I would recommend setting a limit on how much you put into these investments, just a percentage of your investable assets. Sorry this is so long.
Last edited by Abe on Sun Dec 23, 2012 12:04 pm, edited 2 times in total.
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Re: Private Money Lending

Postby cldrunner » Sat Dec 22, 2012 12:54 pm

The high risk, high return mantra applies here. Of course, not every broker is a fraudster like Lull was. But there is no free lunch.

jimbojones


It is all about how you see risk. If these deals were done at 100% LTV then the risk would be very high. Since the loans are done at LTV of under 70% of LTV then the risk is much lower. I would even consider the risk to be lower than owning a bond fund at this time. I see greater risk in any stock or bond fund. Even in a foreclosure situation the investor might make more than in a non foreclosure. The higher return is due to the lack of liquidity in these types of loans. To me this investor is making great loans as long as he has title insurance and a first lien on the property. The loans can still be sold in the open market but not as quickly as a stock or bond. I have done several of these types of investments for short periods of time (1-5 years).

The lack of liquidity is not a big deal if the money is coming out of an IRA or 401K. Many will say you can not use IRA for loans. Simply do a google search for self-directed IRA. I have even bought single family rental home inside the IRA's. No, I can not move my parents, kids, or brothers/sisters into these properties. I do not fix toilets, and I have never spoken to a renter. All that work is done by the management company. Many of these transactions and investments do not even require a mortgage broker. All of my loans have been direct with no broker. Saves both sides some money.

Many think that their Vanguard IRA's are self directed (sorry your wrong). Even with a slightly higher cost of the custodian, my overall cost is way lower than any index fund. Investors need to consider how large and small companies are wasting your indexed dollars. Not a free lunch. Just not a lot of Vanguard lemmings chasing these types of investments. Wall-street is not involved (and I like that).
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Re: Private Money Lending

Postby Abe » Sat Dec 22, 2012 1:46 pm

cldrunner wrote:
The high risk, high return mantra applies here. Of course, not every broker is a fraudster like Lull was. But there is no free lunch.

jimbojones


It is all about how you see risk. If these deals were done at 100% LTV then the risk would be very high. Since the loans are done at LTV of under 70% of LTV then the risk is much lower. I would even consider the risk to be lower than owning a bond fund at this time. I see greater risk in any stock or bond fund. Even in a foreclosure situation the investor might make more than in a non foreclosure. The higher return is due to the lack of liquidity in these types of loans. To me this investor is making great loans as long as he has title insurance and a first lien on the property. The loans can still be sold in the open market but not as quickly as a stock or bond. I have done several of these types of investments for short periods of time (1-5 years).

The lack of liquidity is not a big deal if the money is coming out of an IRA or 401K. Many will say you can not use IRA for loans. Simply do a google search for self-directed IRA. I have even bought single family rental home inside the IRA's. No, I can not move my parents, kids, or brothers/sisters into these properties. I do not fix toilets, and I have never spoken to a renter. All that work is done by the management company. Many of these transactions and investments do not even require a mortgage broker. All of my loans have been direct with no broker. Saves both sides some money.

Many think that their Vanguard IRA's are self directed (sorry your wrong). Even with a slightly higher cost of the custodian, my overall cost is way lower than any index fund. Investors need to consider how large and small companies are wasting your indexed dollars. Not a free lunch. Just not a lot of Vanguard lemmings chasing these types of investments. Wall-street is not involved (and I like that).


I agree with what cldrunner is saying. It's all about how you see risk. Someone who is not knowledgeable in this sort of investment will see more risk than someone who is knowledgeable. One should not take anyones word for anything, but should do the research themselves. Get a title search and be sure you are in first position. Get the value of the property and be sure the loan to value ratio is low enough. Read the paperwork, etc. I have foreclosed on some properties, and as cldrunner said, I made more money by foreclosing. However; I had rather not foreclose. As far as liquidity, a mortgage that one buys at discount can also be sold. There are always people looking for a good investments. And yes, these can be done inside a self directed IRA. I had a friend who invested in discounted mortgages for years. He did this inside a self directed IRA. I might add that I would rather have a few good mortgages right now than invest in a intermediate or long term bond fund. Most of the fraud you hear about is when an agent is involved like a broker or lawyer. I would not do this through a broker. This needs to be hands on, and once again I'll say that you need to know what you are doing.
Last edited by Abe on Sat Dec 22, 2012 2:25 pm, edited 1 time in total.
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Re: Private Money Lending

Postby cldrunner » Sat Dec 22, 2012 2:16 pm

I agree with what cldrunner is saying. It's all about how you see risk. Someone who is not knowledgeable in this sort of investment will see more risk than someone who is knowledgeable. One should not take someones word for anything, but should do the research themselves. Get a title search and be sure you are in first position. Get the value of the property and be sure the loan to value ratio is low enough. Read the paperwork, etc.


You hit the nail on the head. I thought several years ago that these type of investments were high risk. I was not knowledgeable at the time. I read every book I could find on "trust deeds", read every article I could find using self-directed IRA's, and searched every custodians website for educational material. I talked to builders, real estate brokers, and IRA custodians asking these questions. What I found was not many "professionals" know how to use self-directed IRA money to lend to individuals at 8%-12%. CPA's that did not have a clue what UBIT taxes were and bankers who had no idea about non-recourse loans. I am so glad that I took the time and energy (several months) to read all the books and information I could find. Education is very powerful!!!!

Disclaimer: I do not use Entrust and I have no political view of the article.

Article I read today..

SELF-DIRECT WEALTH MAKES NEWS
Something good is going on for the retirement industry when presidential candidate Mitt Romney is called out by the incumbent president for having uber-smart accountants and lawyers build his personal wealth through self-directed retirement plans. Suddenly astute investors want to work out how he did this.

“An industry cannot buy this sort of promotion, ” says Hubert Bromma, CEO and founder of The Entrust Group. “We are here to help investors set up and keep compliant their self-directed IRA accounts.”

The recent news that Mitt Romney has managed to accumulate millions of dollars in his self-directed IRA has caught attention from the media as well as individuals planning for retirement. Romney’s impressive results have many investors expressing interest in following successful tax-deferral strategies.

“Investors are beginning to realize that true self-direction doesn’t just mean that an investor may select from a list of stocks, bonds or mutual funds,” says Bromma, “but may invest in any asset legally permitted by the IRS. As a result, people are looking at self-directed IRA options more closely, especially given our current economic state.”
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Re: Private Money Lending

Postby cldrunner » Sat Dec 22, 2012 2:23 pm

It would be interesting if you could report back to us in a year or two if they actually fixed their credit, and refinanced with a real bank to pay you off...

I'm amazed they aren't just renting... I can't believe they are willingly paying 9.5% interest with such a huge downpayment.

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I expect these owners will clean up their credit in 3-5 years and then refinance at lower rates. Who knows 9.5% maybe low in 5 years........
In the meantime RenoJay makes a great return!!
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Re: Private Money Lending

Postby RenoJay » Sat Dec 22, 2012 4:18 pm

Regarding some of the comments...

1. The broker is introducing me to the borrowers and walking me through the process, but ultimately I am making a first lien loan directly to the borrowers and can see it filed online. Also, I met with the lawyer who drew up the promissory notes and asked a bunch of questions. There are things like this where a broker pools investor money. I would not participate in that because it introduces broker risk. In my case, it is direct lending and even if the broker gets hit by a bus I hold a note on the property and first lien.

2. Regarding why the borrowers are buying and not renting, in my area (of Nevada) home prices are easily 40% - 50% below where most of these people had purchased previously. So there's a conceivable equation where they come out better to default on the expensive house, and take out a 10% loan on the cheap house. Given that they're bringing hefty down payments, from my perspective the greatest risk is if the equity in their homes evaporates so there's nothing to claim if they stop paying. That said, I believe we've already had our major drop and are on the uptick at this point. I could foresee someone turning a house into a meth lab (thereby destroying all equity), but that's why I meet with the borrowers personally to see if their "story" seems to hold water. The reality is that these borrowers are professional people, but they're not spreadsheet types like us Bogleheads. They tend to realize overall that they can't afford where they were and that they can afford the new payment of a loan to me, but I don't feel like their analysis goes much beyond that. Furthermore, they tend to "fall in love" with whatever house they want the loan on...something most of us would try not to do. Then, when they discover that regular banks won't touch them, they ultimately get referred to my broker two weeks before they're supposed to close on the house.

I'm not claiming this is risk free, and maybe in a year I'll be back eating crow, but for now it seems pretty solid. I was extremely skeptical until I started meeting the borrowers in person and realizing that they simply have a different financial view of the world than we Bogleheads.
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Re: Private Money Lending

Postby dandan14 » Sat Dec 22, 2012 10:09 pm

This is very interesting, because I've been seeking out a similar deal. However, I'm not looking to lend to consumers.
What I've been thinking about (and apparently these deals are plentiful) is doing hard money lending to house flippers. From what I've read, the going rate is 4 points with 12%. Lending 65% of after repaired value. First position on deed.

In return for this higher potential return, the risks are:

You over appraise the "after repaired value" and thus lend too much. When the house sells there may not be enough to pay off the loan.
The middleman disappears with your money. You foreclose, but you get the unrepaired house.
The middleman runs out of money and needs more to complete the job. You either have to lend more, foreclose, or try to sell uncompleted.
Foreclosure costs and legal fees eat into returns.
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Re: Private Money Lending

Postby RenoJay » Sat Dec 22, 2012 10:36 pm

dandan14 wrote:This is very interesting, because I've been seeking out a similar deal. However, I'm not looking to lend to consumers.
What I've been thinking about (and apparently these deals are plentiful) is doing hard money lending to house flippers. From what I've read, the going rate is 4 points with 12%. Lending 65% of after repaired value. First position on deed.

In return for this higher potential return, the risks are:

You over appraise the "after repaired value" and thus lend too much. When the house sells there may not be enough to pay off the loan.
The middleman disappears with your money. You foreclose, but you get the unrepaired house.
The middleman runs out of money and needs more to complete the job. You either have to lend more, foreclose, or try to sell uncompleted.
Foreclosure costs and legal fees eat into returns.


I had considered this kind of loan, but I think the risks you outline are accurate and were out of my comfort zone. If I wanted that kind of risk, I'd probably just flip the houses myself. You can also lend to regional/local builders which is possibly a bit safer than to house flippers. Going rate, I believe, is around 10%. Also you could lend to people buying multi family properties/apartments, but this seems messy in the event you need to take ownership. For my loans, I figured owner-occupied with plenty of verifiable equity and motivated, income-qualified borrowers was likely the safest option given my desire for these investments to be hands-free and hopefully mess-free. The best advice someone gave me before I got into this was "Only lend on properties you wouldn't mind owning." Seems like good advice. Also, from my perspective, I feel safer lending $200k on a $400k house than lending $30k on a $60k house, because it seems an owner can easily destroy $30k worth of equity by ignoring routine maintenance, leaks, etc. So all of my loans have been around $200k or so.
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Re: Private Money Lending

Postby cldrunner » Sat Dec 22, 2012 11:01 pm

I had considered this kind of loan, but I think the risks you outline are accurate and were out of my comfort zone. If I wanted that kind of risk, I'd probably just flip the houses myself. You can also lend to regional/local builders which is possibly a bit safer than to house flippers. Going rate, I believe, is around 10%.


I am working with a local builder. Loan is 3 years 12%. Builder pays closing cost on rental home used as collateral first lien. This frees him to build and sell as many spec homes as he can in three years while I sit with a home that has a LTV around 70% of loan. The costs are lower than doing separate deals for each home. Not into the rehabbing scene.
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Re: Private Money Lending

Postby Abe » Sun Dec 23, 2012 12:00 pm

RenoJay wrote:
dandan14 wrote:
.


The best advice someone gave me before I got into this was "Only lend on properties you wouldn't mind owning." Seems like good advice.


"Only lend on properties you wouldn't mind owning."
Yes, that is good advice. The only thing I would add to that is: for the amount of money you put in.
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Re: Private Money Lending

Postby Abe » Thu Dec 27, 2012 4:39 pm

Abe wrote:
RenoJay wrote:

Abe, I've heard of this. Can you explain more how it works, how to find good deals, what the risks are, what the realistic yields are, etc.? I saw some book by a guy who claimed he was once homeless and became a billionaire doing this.


Can go here for information on discounted paper: http://papersourceonline.com/faqs/
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Re: Private Money Lending

Postby Rolyatroba » Tue Nov 05, 2013 9:27 pm

I have been thinking about getting back into trust deed/private money lending and just saw this thread.

I thought I'd chime in because my rookie year at this started in 2007, and even though I thought I had done all the DD, I still lost 80% of this portion of my portfolio. The reason: I didn't invest exclusively in 1st position loans. Every single 2nd position loan was wiped out by the 1st position during the crisis (and I took small losses on the few 1sts I foreclosed on). Beware--Black Swans wipe out 2nd position loans in this asset class!

Even with the bad taste still in my mouth, however, I do think there is good yield to be made in a relatively safe way--if you stay exclusively in 1st position loans and have LTV at no more than 50-60% (among the other standard protections).

I soon plan to increase the fixed income portion of my portfolio and was thinking of having about 10% of FI in this type of investment. I'm not sure if I'll get over the bad taste and do it, but if I do I am thinking about going the pool route (to avoid the headaches and additional expenses of foreclosure). I came across this company in the below link...if anyone watches this video, I'd be curious about your thoughts.

http://www.ramacapital.com/seminar.html
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Re: Private Money Lending

Postby Abe » Wed Nov 06, 2013 5:48 pm

Rolyatroba wrote:I have been thinking about getting back into trust deed/private money lending and just saw this thread.

I thought I'd chime in because my rookie year at this started in 2007, and even though I thought I had done all the DD, I still lost 80% of this portion of my portfolio. The reason: I didn't invest exclusively in 1st position loans. Every single 2nd position loan was wiped out by the 1st position during the crisis (and I took small losses on the few 1sts I foreclosed on). Beware--Black Swans wipe out 2nd position loans in this asset class!

Even with the bad taste still in my mouth, however, I do think there is good yield to be made in a relatively safe way--if you stay exclusively in 1st position loans and have LTV at no more than 50-60% (among the other standard protections).

I soon plan to increase the fixed income portion of my portfolio and was thinking of having about 10% of FI in this type of investment. I'm not sure if I'll get over the bad taste and do it, but if I do I am thinking about going the pool route (to avoid the headaches and additional expenses of foreclosure). I came across this company in the below link...if anyone watches this video, I'd be curious about your thoughts.

http://www.ramacapital.com/seminar.html


I have been investing in mortgages for many years, some hard money loans and some buying established mortgages at discount. You may want to read some of my prior post on this thread. I would not recommend giving your money to someone else to invest in mortgages, period. I don't care how convincing they are; I've seen too many people lose money doing that. I deal directly with the mortgagors (borrower). You have to be careful with second mortgages. You never want to hold a small second behind a large first mortgage. The reason is you may have to pay off the first mortgage to protect your second. You said you started in 2007. As you already know, that was the absolute worst time to get started investing in mortgages. I had some I had to foreclose on, which I actually made more money on, but I still don't like to do it. I would rather just collect the payments until paid off. I have some that I'm nursing along, but as long as they don't completely stop making payments, I'm okay with it. I can always foreclose if I have too. I think I've made it through the worst part of the 2008 crash now. As you said, there are good yields to be made in a relatively safe way -- if you know what you are doing and you do due diligence. I agree with you, stay with first mortgages, low LTV ratios, read all the paperwork and deal directly with the buyers. As I said earlier, I would not recommend the pool route.
Last edited by Abe on Wed Nov 06, 2013 6:04 pm, edited 1 time in total.
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Re: Private Money Lending

Postby tc101 » Wed Nov 06, 2013 5:58 pm

I have been doing this on and off for 20 years, and it is a part of the reason I was able to retire at age 55. I currently have money lent out at 12%.

I have an advantage though. My brother handles all the deals and I am a silent partner. He knows what he is doing and I trust him. I pay him a small fee.

We have never lost principle in over 20 years, although there were several times when things went wrong that we got back our money with much effort and no interest.

You have to know what your are doing, or find someone who knows what they are doing who you can trust. Unfortunately I don't know enough to advise you. I just count on my brother.

One thing I do know is that you should never, Never, NEVER take a second mortgage.
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Re: Private Money Lending

Postby Abe » Wed Nov 06, 2013 6:34 pm

tc101 wrote:I have been doing this on and off for 20 years, and it is a part of the reason I was able to retire at age 55. I currently have money lent out at 12%.

I have an advantage though. My brother handles all the deals and I am a silent partner. He knows what he is doing and I trust him. I pay him a small fee.

We have never lost principle in over 20 years, although there were several times when things went wrong that we got back our money with much effort and no interest.

You have to know what your are doing, or find someone who knows what they are doing who you can trust. Unfortunately I don't know enough to advise you. I just count on my brother.

One thing I do know is that you should never, Never, NEVER take a second mortgage.


It's good you have your brother who is knowledgeable and you can trust. For someone who has not had much experience, I agree they should probably stay away from second mortgages. Having said that, I have to say that I have made a lot of money with seconds. For instance, one time a fellow sold his house for $50,000. The bank financed $40,000. and the seller took back a second mortgage for $10,000. He found out the buyers were bogus but I didn't know. He came to me, and I bought his $10,000. second mortgage for $4,000.00. The buyer defaulted on both the first and second mortgage. I just knew I was going to lose my $4.000, but I decided to try and salvage it. I went to the bank and I asked them what was the least they would take for their $40,000 first mortgage if I paid it off and they would release it. We negotiated and I finally got them down to $30,000. I then went to the buyers and told them I would get them off the hook for the first and second mortgage if they would deed the property to me in lieu of foreclosure. They agreed so I then had about $34,000 in the deal and I owned the house. I hired a good real estate agent and she sold the house for $65.000. I made a pretty good chunk of money, but I wouldn't want to go through that again. Like I said, you need to know what you are doing.
Edit to add: After that the original seller came back to me and wanted to know how much I sold the house for. I wouldn't tell him. I just let him think he skinned me. I told my wife if I get skinned like that very many times, I'll be rich.
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Re: Private Money Lending

Postby tc101 » Wed Nov 06, 2013 10:29 pm

I made a pretty good chunk of money, but I wouldn't want to go through that again.


That's the way I feel about real estate transactions. It is stressful, and I don't want to deal with it. You made $30K with probably less than 40 hours total work, and ideally that seems like a great deal, but for me it is so stressful that I don't want to deal with it. I like it when things just role along smoothly and I get a good high rate of return. That is why I would never deal with second mortgages.
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Re: Private Money Lending

Postby Rolyatroba » Wed Nov 06, 2013 10:53 pm

Appreciate the input from both of you.

Abe wrote:As I said earlier, I would not recommend the pool route.

I'm wondering if you would give some detailed reasoning why you wouldn't recommend the pool route. I did just look thru the thread and didn't see any mention of pools.

My reasoning on going the pool route is primarily for the advantages below:

1. Foreclosure risk is diversified in a pool
2. Collection and foreclosure activities are handled by the pool manager
3. Never a need for direct contact with the borrower
4. Never need to manage a foreclosure asset

Now, you have to perform some DD on the pool (understanding it's deal rules, auditor checks, performance history, etc.), and give up some amount of spread on the loan rate and fees, but it seems that if you like the asset class and have a pool manger that can be trusted, then that is the way to go (unless you also enjoy the work associated with managing your deeds, and don't want to give a spread to a manager).
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Re: Private Money Lending

Postby wedsep » Wed Nov 06, 2013 11:47 pm

Abe wrote:Edit to add: After that the original seller came back to me and wanted to know how much I sold the house for. I wouldn't tell him. I just let him think he skinned me. I told my wife if I get skinned like that very many times, I'll be rich.

Isn't that information publicly available like in many cities?
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Re: Private Money Lending

Postby RenoJay » Thu Nov 07, 2013 11:37 am

Rolyatroba wrote:Appreciate the input from both of you.

Abe wrote:As I said earlier, I would not recommend the pool route.

I'm wondering if you would give some detailed reasoning why you wouldn't recommend the pool route. I did just look thru the thread and didn't see any mention of pools.

My reasoning on going the pool route is primarily for the advantages below:

1. Foreclosure risk is diversified in a pool
2. Collection and foreclosure activities are handled by the pool manager
3. Never a need for direct contact with the borrower
4. Never need to manage a foreclosure asset

Now, you have to perform some DD on the pool (understanding it's deal rules, auditor checks, performance history, etc.), and give up some amount of spread on the loan rate and fees, but it seems that if you like the asset class and have a pool manger that can be trusted, then that is the way to go (unless you also enjoy the work associated with managing your deeds, and don't want to give a spread to a manager).


All of my lending has been to individuals (whom I met) on terms I understood for first mortgages with good LTV's. I recently spoke to a financial adviser (paid her just for the 1.5 hour talk for any who question this move.) Overall she liked what I was doing and thought it was "safe enough" the way I was doing it, but advised against pooled loans. She told a personal story of how she'd put her clients into a pooled account a few years ago which had a sterling reputation and decades of history. But then the old man running it retired and his idiot son lost everyone's money. For me, I want to personally evaluate each deal and own the first mortgage. (I have occasionally taken a second mortgage as ADDITIONAL collateral, but I also own the first on the property in question.)
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Re: Private Money Lending

Postby Abe » Thu Nov 07, 2013 1:26 pm

RenoJay wrote:
Rolyatroba wrote:Appreciate the input from both of you.

Abe wrote:As I said earlier, I would not recommend the pool route.

I'm wondering if you would give some detailed reasoning why you wouldn't recommend the pool route. I did just look thru the thread and didn't see any mention of pools.

My reasoning on going the pool route is primarily for the advantages below:

1. Foreclosure risk is diversified in a pool
2. Collection and foreclosure activities are handled by the pool manager
3. Never a need for direct contact with the borrower
4. Never need to manage a foreclosure asset

Now, you have to perform some DD on the pool (understanding it's deal rules, auditor checks, performance history, etc.), and give up some amount of spread on the loan rate and fees, but it seems that if you like the asset class and have a pool manger that can be trusted, then that is the way to go (unless you also enjoy the work associated with managing your deeds, and don't want to give a spread to a manager).


All of my lending has been to individuals (whom I met) on terms I understood for first mortgages with good LTV's. I recently spoke to a financial adviser (paid her just for the 1.5 hour talk for any who question this move.) Overall she liked what I was doing and thought it was "safe enough" the way I was doing it, but advised against pooled loans. She told a personal story of how she'd put her clients into a pooled account a few years ago which had a sterling reputation and decades of history. But then the old man running it retired and his idiot son lost everyone's money. For me, I want to personally evaluate each deal and own the first mortgage. (I have occasionally taken a second mortgage as ADDITIONAL collateral, but I also own the first on the property in question.)


Rolyatroba: Like RenoJay, all my lending has been directly with individual borrowers. That way I have full control. I have heard many times where investors lost money in pools letting other people handle it for them. I'm sure some of them are okay, but for me I had rather have more control.
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Re: Private Money Lending

Postby RenoJay » Thu Nov 07, 2013 3:04 pm

Abe wrote:
RenoJay wrote:
Rolyatroba wrote:Appreciate the input from both of you.

Abe wrote:As I said earlier, I would not recommend the pool route.

I'm wondering if you would give some detailed reasoning why you wouldn't recommend the pool route. I did just look thru the thread and didn't see any mention of pools.

My reasoning on going the pool route is primarily for the advantages below:

1. Foreclosure risk is diversified in a pool
2. Collection and foreclosure activities are handled by the pool manager
3. Never a need for direct contact with the borrower
4. Never need to manage a foreclosure asset

Now, you have to perform some DD on the pool (understanding it's deal rules, auditor checks, performance history, etc.), and give up some amount of spread on the loan rate and fees, but it seems that if you like the asset class and have a pool manger that can be trusted, then that is the way to go (unless you also enjoy the work associated with managing your deeds, and don't want to give a spread to a manager).


All of my lending has been to individuals (whom I met) on terms I understood for first mortgages with good LTV's. I recently spoke to a financial adviser (paid her just for the 1.5 hour talk for any who question this move.) Overall she liked what I was doing and thought it was "safe enough" the way I was doing it, but advised against pooled loans. She told a personal story of how she'd put her clients into a pooled account a few years ago which had a sterling reputation and decades of history. But then the old man running it retired and his idiot son lost everyone's money. For me, I want to personally evaluate each deal and own the first mortgage. (I have occasionally taken a second mortgage as ADDITIONAL collateral, but I also own the first on the property in question.)


Rolyatroba: Like RenoJay, all my lending has been directly with individual borrowers. That way I have full control. I have heard many times where investors lost money in pools letting other people handle it for them. I'm sure some of them are okay, but for me I had rather have more control.


Part of the risk of pools, in my opinion, is that the operator often gets compensated with up-front points and though his loan criteria and underwriting standards might start out very rigid, over time he may let his standards lapse a bit if he ends up with too much money in the pool chasing too few good deals. I doubt the investors would be aware when this change occurs.
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Re: Private Money Lending

Postby Rolyatroba » Thu Nov 07, 2013 3:04 pm

Ok...understand on the pool manager risk.

So, if I was to do on my own, and being I don't live in a very large area (thus not many opportunities), would you recommend a service like the below to find potential loans?

http://www.loanmls.com

Or just stay away from this if you can't actually visit the property and meet the borrower?
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Re: Private Money Lending

Postby Abe » Thu Nov 07, 2013 4:37 pm

wedsep wrote:
Abe wrote:Edit to add: After that the original seller came back to me and wanted to know how much I sold the house for. I wouldn't tell him. I just let him think he skinned me. I told my wife if I get skinned like that very many times, I'll be rich.

Isn't that information publicly available like in many cities?


Where I live, you can go to the county clerk and recorder and look at the deed. It is avaliable to the public. The deed usually does not show the actual sales price. Instead, they usually say something like "for 10.00 dollars paid and good and valuable consideration". Some people look at the revenue stamps on the deed to try and determine the sales price. By law, you are required to put $3.30 revenue stamps per thousand dollars of sales price on the deed in my area. Some people put more than the required minimum amount of revenue stamps on the deed so that it will show they paid more than they actually paid. The guy I was dealing with probably did not know how to do this.
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Re: Private Money Lending

Postby Abe » Thu Nov 07, 2013 5:12 pm

Rolyatroba wrote:Ok...understand on the pool manager risk.

So, if I was to do on my own, and being I don't live in a very large area (thus not many opportunities), would you recommend a service like the below to find potential loans?

http://www.loanmls.com

Or just stay away from this if you can't actually visit the property and meet the borrower?


I would suggest doing it on your own, but I don't know how knowledgeable you are. If you are not knowledgeable about buying notes, you need to do some studying before you do anything. You can go here and get a basic idea about how it works. http://papersourceonline.com/faqs/
You say you don't live in a very large area. I live in a rural area and that is where I had rather do business. Do you know how to discount a note using a financial calculator? Do you know how to create paper? Do you understand the difference in a mortgage and a land contract? If not, you need to do some studying first.
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Re: Private Money Lending

Postby RenoJay » Thu Nov 07, 2013 5:51 pm

Rolyatroba wrote:Ok...understand on the pool manager risk.

So, if I was to do on my own, and being I don't live in a very large area (thus not many opportunities), would you recommend a service like the below to find potential loans?

http://www.loanmls.com

Or just stay away from this if you can't actually visit the property and meet the borrower?


The only reason I got into this is because I interviewed all three brokers in my town who do this sort of thing and one of them stood head and shoulders above the others regarding knowledge, reputation, deal flow, etc. Had I not met him, I wouldn't be doing it at all. So my thought is find out who brokers these deals in your area and try to figure out if they're more interested in lining their pockets or yours. If you decide to take the learn-by-doing-myself route, I suggest starting very slow and with very small amounts of money.
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Re: Private Money Lending

Postby leonard » Thu Nov 07, 2013 5:58 pm

Why would someone want to undertake this level of complexity for what is essentially I geographically undiversified portfolio of loans. And, provide a cut to a middle man at the same time.

What is the anticipate rate of return that one is looking at with this investment and is it high enough to compensate for the undiversified, concentrated risk.
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Re: Private Money Lending

Postby Abe » Thu Nov 07, 2013 7:06 pm

leonard wrote:Why would someone want to undertake this level of complexity for what is essentially I geographically undiversified portfolio of loans. And, provide a cut to a middle man at the same time.

What is the anticipate rate of return that one is looking at with this investment and is it high enough to compensate for the undiversified, concentrated risk.


The reason I do it is because I get extremely high returns. The risk can be mitigated if you know what you are doing. To answer your question, "What is the anticipate rate of return that one is looking at with this investment and is it high enough to compensate for the undiversified, concentrated risk"? Back when interest rates were extremely high, my average return was 24%. Now it's more like 14%, so I would say the return is high enough. I have never lost any money investing in paper which is more than I can say for stocks and bonds. It is a niche in the investment world that a lot of people don't know about. The ones that do can make a lot of money.
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Re: Private Money Lending

Postby RenoJay » Thu Nov 07, 2013 7:09 pm

leonard wrote:Why would someone want to undertake this level of complexity for what is essentially I geographically undiversified portfolio of loans. And, provide a cut to a middle man at the same time.

What is the anticipate rate of return that one is looking at with this investment and is it high enough to compensate for the undiversified, concentrated risk.


I certainly don't think this is for everyone, so I'll speak from my own experience.

1. Regarding geography risk: I live in one of the areas hardest hit by the housing downturn. In early 2012, I was seeing signs of a market bottom so figured that it was a relatively safe bet given that all the loans had ample equity in them when I made them. (I figured the odds of an additional 30% downturn in the housing market from such a low point was unlikely.) Furthermore, our area does not typically suffer from earthquakes, tornados, floods, etc. and all the homes had fire insurance. I read the other day that home price appreciation in our area in the past couple years has been near the top of all metros, so apparently my justification at the time was accurate. Regarding economic risk, our greatest import is Californians who move to my area for a less expensive lifestyle and to save on taxes. I don't see that supply running out anytime soon.

2. Regarding middleman: He's paid 1-2 points on the loans BY THE BORROWER and all my fees are paid by the borrower as well. So I focus on the 9.5% - 10% total expected return which, in my worldview, is sufficient justification for the risk and hassles. As it turns out, I've been doing this for nearly two years, have made six or so loans, and no one has been late on a single payment. Should I need to foreclose on someone, ultimately all my fees are supposedly covered by the borrower (in the form of equity in the home.) So the bottom line is that I expect 9.5%+ returns as long as I only loan on homes with sufficient equity

Again, I certainly would not try to draw anyone into this line of investing if they weren't fairly entrepreneurial and ready to get a little dirty, but I'm certainly happy that I'm doing it.
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Re: Private Money Lending

Postby Abe » Thu Nov 07, 2013 7:49 pm

RenoJay wrote:
leonard wrote:Why would someone want to undertake this level of complexity for what is essentially I geographically undiversified portfolio of loans. And, provide a cut to a middle man at the same time.

What is the anticipate rate of return that one is looking at with this investment and is it high enough to compensate for the undiversified, concentrated risk.


I certainly don't think this is for everyone, so I'll speak from my own experience.

1. Regarding geography risk: I live in one of the areas hardest hit by the housing downturn. In early 2012, I was seeing signs of a market bottom so figured that it was a relatively safe bet given that all the loans had ample equity in them when I made them. (I figured the odds of an additional 30% downturn in the housing market from such a low point was unlikely.) Furthermore, our area does not typically suffer from earthquakes, tornados, floods, etc. and all the homes had fire insurance. I read the other day that home price appreciation in our area in the past couple years has been near the top of all metros, so apparently my justification at the time was accurate. Regarding economic risk, our greatest import is Californians who move to my area for a less expensive lifestyle and to save on taxes. I don't see that supply running out anytime soon.

2. Regarding middleman: He's paid 1-2 points on the loans BY THE BORROWER and all my fees are paid by the borrower as well. So I focus on the 9.5% - 10% total expected return which, in my worldview, is sufficient justification for the risk and hassles. As it turns out, I've been doing this for nearly two years, have made six or so loans, and no one has been late on a single payment. Should I need to foreclose on someone, ultimately all my fees are supposedly covered by the borrower (in the form of equity in the home.) So the bottom line is that I expect 9.5%+ returns as long as I only loan on homes with sufficient equity

Again, I certainly would not try to draw anyone into this line of investing if they weren't fairly entrepreneurial and ready to get a little dirty, but I'm certainly happy that I'm doing it.


I agree with RenoJay, this is not for everyone, and I do not want anyone to think they can make a lot of money the easy way. Having said that, I can give an example of one deal that was not a good one in that the buyers defaulted. I made a loan to buy a house under the officer next door program. This is a government program where the government sells foreclosed homes to police officers for half the appraised value. The appraisal on the house was $90,000. In July 2007, I loaned them $45,000 (50% LTV). The buyers made a few payments and then defaulted. I foreclosed and got ownership of the house. This was right in the middle of the big real estate crash so housing values were down. I decided to rent the house until real estate values came back. I still own the house. I have collected a little over $36,000. after expenses in payments and rent. My real estate lady tells me she can sell the house now for $110,000. So, this was a bad one in that I made the loan right before the crash and the borrowers defaulted, but my return was pretty good. And what was my risk? It didn't look like much risk to me.
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Re: Private Money Lending

Postby cldrunner » Fri Nov 08, 2013 4:41 pm

I agree with RenoJay, this is not for everyone, and I do not want anyone to think they can make a lot of money the easy way. Having said that, I can give an example of one deal that was not a good one in that the buyers defaulted. I made a loan to buy a house under the officer next door program. This is a government program where the government sells foreclosed homes to police officers for half the appraised value. The appraisal on the house was $90,000. In July 2007, I loaned them $45,000 (50% LTV). The buyers made a few payments and then defaulted. I foreclosed and got ownership of the house. This was right in the middle of the big real estate crash so housing values were down. I decided to rent the house until real estate values came back. I still own the house. I have collected a little over $36,000. after expenses in payments and rent. My real estate lady tells me she can sell the house now for $110,000. So, this was a bad one in that I made the loan right before the crash and the borrowers defaulted, but my return was pretty good. And what was my risk? It didn't look like much risk to me.


Wow!! This actually sounds like a great deal. You made the loan at 50% of value. The default on the loan made you more money than if they would have made all your payments. It sounds like you were able to actually purchase the home at the the officer next door discount. Sounds like you have made nearly an 80% return in 5-6 years which is a 13-16% yearly return. I bet your note was not for that much. If you end up selling the house you will end up with additional return from appreciation. This was not a bad investment-----this was a GREAT investment. This is what makes this type of private lending such a great investment.
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Re: Private Money Lending

Postby Abe » Fri Nov 08, 2013 6:08 pm

cldrunner wrote:
I agree with RenoJay, this is not for everyone, and I do not want anyone to think they can make a lot of money the easy way. Having said that, I can give an example of one deal that was not a good one in that the buyers defaulted. I made a loan to buy a house under the officer next door program. This is a government program where the government sells foreclosed homes to police officers for half the appraised value. The appraisal on the house was $90,000. In July 2007, I loaned them $45,000 (50% LTV). The buyers made a few payments and then defaulted. I foreclosed and got ownership of the house. This was right in the middle of the big real estate crash so housing values were down. I decided to rent the house until real estate values came back. I still own the house. I have collected a little over $36,000. after expenses in payments and rent. My real estate lady tells me she can sell the house now for $110,000. So, this was a bad one in that I made the loan right before the crash and the borrowers defaulted, but my return was pretty good. And what was my risk? It didn't look like much risk to me.


Wow!! This actually sounds like a great deal. You made the loan at 50% of value. The default on the loan made you more money than if they would have made all your payments. It sounds like you were able to actually purchase the home at the the officer next door discount. Sounds like you have made nearly an 80% return in 5-6 years which is a 13-16% yearly return. I bet your note was not for that much. If you end up selling the house you will end up with additional return from appreciation. This was not a bad investment-----this was a GREAT investment. This is what makes this type of private lending such a great investment.


Yes, this is the point I've been trying to make. If you know what you are doing, you can make a lot of money doing this. The interest rate on the loan was 14%. If it had just paid out and the borrowers had not defaulted, I would have made 14%. The reason the interest rate was so high was because the buyers credit was so bad they could not get a loan. Since they were only paying half the appraised value for the house, it was still a good deal for them. Prior to the real estate crash, most of the the buyers (borrowers) that I did this with would wait 3 1/2 years, then refinance and pay me off. They were elgible to do this after the 3 1/2 year period under the program. Since the crash, they can't get refinanced. That's why I've had some I had to foreclose on. Even though I make more if I foreclose, I would rather they just pay out with no problems, but if they default, I don't have any choice. I am now renting this particular house for $725.00 a month. It depends on how you look at it but $725.00 per month for 12 months is $8,700 before expenses. My out of pocket investment is $9,000 ($45,000-$36,000). So you could say my return is roughly 100%. The fellow who taught me how to do all this told me one time, "when it's this good, don't worry about figuring your return, just say it's good enough". :happy
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Re: Private Money Lending

Postby RenoJay » Mon Nov 11, 2013 11:38 am

This morning I found this article about private money lending on marketwatch.com: http://www.marketwatch.com/story/bank-wont-give-you-a-home-loan-ask-hank-2013-11-11

By the time an article like this comes out, I figure the asset class has maybe two more good years before it totally devolves into the wild west.
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Re: Private Money Lending

Postby Abe » Mon Nov 11, 2013 7:09 pm

RenoJay wrote:This morning I found this article about private money lending on marketwatch.com: http://www.marketwatch.com/story/bank-wont-give-you-a-home-loan-ask-hank-2013-11-11

By the time an article like this comes out, I figure the asset class has maybe two more good years before it totally devolves into the wild west.


I started out making unsecured loans which are much riskier than mortgage loans. I have been making mortgage backed loans (hard money and buying at discount) for over 35 years. This is not anything new and it will not go away. There always has been and always will be people who can't get traditional loans. This is a quote from the article implying how risky it is: “You’ve got unsophisticated lenders and unsophisticated buyers [and] it sounds like a very risky combination,” says Doug Miller, a real estate attorney and executive director of Consumer Advocates in American Real Estate. I keep saying this but you've got to know what you are doing if you do this. Being knowledgeable mitigates a lot of the risk. The borrowers are almost always unsophisticated. I have bought used mobile home paper. You would think that is pretty risky. Maybe I'm lucky, but I have never lost a dime.
Slow and steady wins the race.
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Re: Private Money Lending

Postby Abe » Thu Nov 14, 2013 12:20 pm

Thanks RenoJay for your post. You and a couple of others on this site show some interest in private money lending, but for the most part everyone else is negative about it. I have been doing it for many years and have been successful with it getting returns much higher than traditional investments. I thought that there would be more interest in it here, but I was wrong. What bothers me is a lot of people here just automatically assume it's too risky or it's too illiquid or you can't do it here or whatever. I'm not saying it's for everyone or that one should just jump into it without some knowledge. I've said this before and I'll say it again, you need to know what you are doing it you are going to do this. It is not passive, it is hands on investing You can't just turn your money over to someone else and expect them to look out for your best interest. It takes time, knowledge and some work, but it is lucrative. As far as risk, all investments have some risk. A lot of the risk in private money lending can be mitigated if you are knowledgeable. I agree with Boglehead type investing, especially since I have gotten older, but it not the only road to Dublin, as Taylor would say. All I'm saying to others on this board is keep an open mind; don't automatically assume something won't work until you at least look at it. Back when I first started doing private money lending I was skeptical. I am basically conservative, but after I did a few and got some experience I was glad I did. I think a lot of people miss out on a lot of good investments because they have a preconceived idea that it is bad. I may post this on a couple of other threads that I have posted on regarding private money lending.
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Re: Private Money Lending

Postby cldrunner » Thu Nov 14, 2013 1:41 pm

Abe wrote:Thanks RenoJay for your post. You and a couple of others on this site show some interest in private money lending, but for the most part everyone else is negative about it. I have been doing it for many years and have been successful with it getting returns much higher than traditional investments. I thought that there would be more interest in it here, but I was wrong. What bothers me is a lot of people here just automatically assume it's too risky or it's too illiquid or you can't do it here or whatever. I'm not saying it's for everyone or that one should just jump into it without some knowledge. I've said this before and I'll say it again, you need to know what you are doing it you are going to do this. It is not passive, it is hands on investing You can't just turn your money over to someone else and expect them to look out for your best interest. It takes time, knowledge and some work, but it is lucrative. As far as risk, all investments have some risk. A lot of the risk in private money lending can be mitigated if you are knowledgeable. I agree with Boglehead type investing, especially since I have gotten older, but it not the only road to Dublin, as Taylor would say. All I'm saying to others on this board is keep an open mind; don't automatically assume something won't work until you at least look at it. Back when I first started doing private money lending I was skeptical. I am basically conservative, but after I did a few and got some experience I was glad I did. I think a lot of people miss out on a lot of good investments because they have a preconceived idea that it is bad. I may post this on a couple of other threads that I have posted on regarding private money lending.


Abe,

I agree with you completely. I have also done private lending and I actually find it the second best investment that I have besides holding income producing real estate. I have purchased notes and real estate in my self-directed IRA's. I favor new single family homes that I can buy at wholesale that will require very little maintenance. I have been doing this for a few years but I read my first article about this a few weeks go in the wall street journal.
I have heard all the excuses about real estate. I have never fixed a toilet or had any dealings with tenants. They do not even know who they are renting from. A good property manager and renting to working class professionals goes a long way to protecting the investment. I am like you, I believe in the boglehead philosophy but only for my assets that are shorter term. I wrote this in another post recently:

1. Income producing real estate and trust deeds are for long term investment-----Stocks and bonds are for liquidity!!

2. Don't confuse "Income" with "Cash Flow". They are not the same.
Cash flow is created when you sell stock to pay your bills. A well diversified stock portfolio after management fees and expenses provides very little dividend income. Stock investors need to rely on growth to maintain the stock portfolio. If growth does not materialize due to low returns, sequence of returns, and inflation, they are forced to sell off more and more of their principal. Rental income provides a predictable monthly income and does not force you to liquidate your principle to create "cash flow" to pay your bills.


My personal portfolio consists of 75% real estate and trust deeds, and 25% in a 50% stock(index) and 50% short term interest income(401K option) portfolio. The 75% portion has returns that range from 8-14% paid monthly. The overall average of the 75% portion returns a steady 11-12%. The trust deeds are at 12%. The returns are very steady but do vary because when I add additional properties they may be leverage and have a non recourse loan from 25%-70%. In addition, my rents for the very same houses vary by $100 due to length of lease and demand at time of rental. No big deal. What is amazingly powerful about this type of portfolio is the sequence of return is very steady which is very powerful when compounding.

It is actually funny that on this website taking a portfolio at retirement and giving( I say giving because the insurance company wins big time) 1/2 or more to an insurance company as an annuity paying out 4-6% is highly acceptable with no return of principle for passing along to family. On the other hand, owning trust deeds and real estate is not highly acceptable and frowned upon. In the small town I live in the wealthiest individuals I know have made their money in small businesses and real estate. They are also the ones who love private lending and trust deeds because they understand it and they really do not want to deal with the banks. Rental property for me is a long term annuity that pays a highly predictable return and passes to my family. I enjoy yours and RenoJay's comments and philosophy. Count me as a big fan of private lending, trust deeds, self directed IRA's, and income producing real estate using a good property manager.

http://online.wsj.com/news/articles/SB1 ... 1879768178



New Homes Get Built With Renters in Mind
Investors Snap Up Finished Single-Family Homes, Develop Vacant Lots, for a Hot Market
By
Conor Dougherty
connect
Nov. 3, 2013 8:01 p.m. ET

More single-family homes across the nation are being built for renters, a shift that mirrors a steady decline in homeownership in the years since the housing bust.

Until recently, real-estate investors had focused primarily on scooping up tens of thousands of foreclosed homes, at a sharp discount, and converting them into rental properties. Now that the pool of these properties has declined and prices have risen, these investors are...
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Re: Private Money Lending

Postby Abe » Thu Nov 14, 2013 3:45 pm

Thank you for your post cldrunner. You, RenoJay and maybe a few others are the only ones here interested in this. I was interested in your comments about having a property manager manage you properties. That may be an option for me since I am getting older and getting tired of the management. I have sold some and owner financed them and that works out okay. It's all income streams. I think one needs to have at least some entrepreneurial spirit to do what we are talking about. For someone who just wants to turn their money over to someone else, I don't think this is for them.
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Re: Private Money Lending

Postby cldrunner » Fri Nov 22, 2013 3:31 pm

Abe wrote:Thank you for your post cldrunner. You, RenoJay and maybe a few others are the only ones here interested in this. I was interested in your comments about having a property manager manage you properties. That may be an option for me since I am getting older and getting tired of the management. I have sold some and owner financed them and that works out okay. It's all income streams. I think one needs to have at least some entrepreneurial spirit to do what we are talking about. For someone who just wants to turn their money over to someone else, I don't think this is for them.



Most of these private lending threads are started by links to articles that show investors lending their money to individuals with bad credit. That can not be further from the truth. I will expand further about one of my private lending arrangements utilizing an IRA to purchase a single family rental home.

Investor A (ME)- Has IRA that is mostly conservative. Mid 40's looking for long term investment in real estate. IRA value is 100K.
Investor B (Friend) - Investor B is a friend that is living on Social Security(mid 70s) and has a 31K dollar IRA that is at the bank making less than 1%.

Investor A and B transfer their IRA's to a self-directed IRA custodian. Investor A (ME) buys a $122,000 home(including closing cost) with his IRA. Investor A offer Investor B a 10% rate of return on a $30,000 3 year interest only loan. The decision was made to have an interest only loan to maximize the return for investor B. The title company worked with the IRA custodian to accomplish the closing and the title company attorney drew up to promissory note (included in closing cost). Investor B has a first lien on the rental property and went from making $25 a month in income to $250 dollars a month in income. The net after custodian fees are about $225 a month. investor A closes on the home and has it rented out in 3 weeks on a 2 year lease for $1,400 a month. After property management fee, taxes, insurance, mortgage payment, and a monthly hold-back for repairs-- investor A makes about an 11% return on his investment which does not include any appreciation. Investor A still has roughly 10K in this IRA for any unexpected expenses--- or if the property would have stayed vacant for a longer period of time. Investor A will pay investor B back his principal in 3 years or they will amend the promissory note to continue the arrangement so investor B can continue receiving his monthly income. In three years the parties can also decide to have the payback as principal and interest. It is a win-win for both investors. Investor A can utilize other IRA funds for additional single family rentals to add to his existing real estate portfolio. Investor B added $200 a month in income to add to his social security. This is not a highly leverage deal and Investor B can foreclose on property if his monthly payments are not made. Investor A (ME) makes these same deals with other homes with loans in the range of 80K-100K. These loans can not pay a 10% return. The investment can only pay 7-8% in order for investor A to be able to make a 10%-12% return. Investor A can and has also used non-recourse loans from a bank(Specializing in these types of loans) on a 10-15 year amortization at 4-5%.

The bank would also have only made this loan for greater than 50K. In this deal Investor A wanted Investor B (friend) to have the highest possible return while still being a good investment. The custodian automatically transfer the monthly mortgage amount from investor A's account directly into investor B's account every month. In a nutshell this is how a private loan is accomplished using an IRA. Both investor's have a very steady rate of return with Investor A taking on greater risk of owning the home but achieving a greater return on investment. After the closing of the home investor A has not had to do anything with this investment except read his monthly statement from the property manager and Investor B receives a monthly e-mail from custodian informing him of his monthly payment had been credited to his account. Investor B receives his monthly check even if the home is not rented. He also does not have to deal with ownership of the home. These types of deals are done every day.

Why does investor A like real estate in IRA:

*Added diversification to indexed stock and bond portfolio.
*Steady sequence of returns. 8-14% (Depending on leverage and rents). A more predictable retirement plan than relying on stocks and bonds.
*Hedge against inflation.
*Long-term investment
*Takes wall-street out of the picture
*Can drive past investment any time
*Provides an annuity stream of income while living and passes appreciated property to family instead of insurance company
*About 100 more but for another post.
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Re: Private Money Lending

Postby MooreBonds » Sat Nov 23, 2013 12:53 pm

Abe wrote:Yes, this is the point I've been trying to make. If you know what you are doing, you can make a lot of money doing this. The interest rate on the loan was 14%. If it had just paid out and the borrowers had not defaulted, I would have made 14%. The reason the interest rate was so high was because the buyers credit was so bad they could not get a loan. Since they were only paying half the appraised value for the house, it was still a good deal for them. Prior to the real estate crash, most of the the buyers (borrowers) that I did this with would wait 3 1/2 years, then refinance and pay me off. They were elgible to do this after the 3 1/2 year period under the program. Since the crash, they can't get refinanced. That's why I've had some I had to foreclose on. Even though I make more if I foreclose, I would rather they just pay out with no problems, but if they default, I don't have any choice. I am now renting this particular house for $725.00 a month. It depends on how you look at it but $725.00 per month for 12 months is $8,700 before expenses. My out of pocket investment is $9,000 ($45,000-$36,000). So you could say my return is roughly 100%. The fellow who taught me how to do all this told me one time, "when it's this good, don't worry about figuring your return, just say it's good enough". :happy


One thing to remember, however - it's not too uncommon that when people are looking foreclosure in the face, they may turn to a 'no-holds barred' mode and do things like strip copper piping out to sell for scrap, rip appliances out to sell (not caring if they damage cabinetry or walls), and otherwise not give a damn on how they take care of the house, since they're going to be kicked out and loose it all in a few weeks. If substantial repairs are required to bring the property back to a rentable/sellable condition and you have to hire contractors to fix it, depending on the home value it can quickly turn a 60% LTV loan in a property into a 100% LTV once you add in the repair cost.

It's true that not every borrower facing foreclosure resorts to these tactics - but be aware that it can and does happen with more than just a handful of borrowers.
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Re: Private Money Lending

Postby Abe » Sat Nov 23, 2013 1:49 pm

MooreBonds wrote:
Abe wrote:Yes, this is the point I've been trying to make. If you know what you are doing, you can make a lot of money doing this. The interest rate on the loan was 14%. If it had just paid out and the borrowers had not defaulted, I would have made 14%. The reason the interest rate was so high was because the buyers credit was so bad they could not get a loan. Since they were only paying half the appraised value for the house, it was still a good deal for them. Prior to the real estate crash, most of the the buyers (borrowers) that I did this with would wait 3 1/2 years, then refinance and pay me off. They were elgible to do this after the 3 1/2 year period under the program. Since the crash, they can't get refinanced. That's why I've had some I had to foreclose on. Even though I make more if I foreclose, I would rather they just pay out with no problems, but if they default, I don't have any choice. I am now renting this particular house for $725.00 a month. It depends on how you look at it but $725.00 per month for 12 months is $8,700 before expenses. My out of pocket investment is $9,000 ($45,000-$36,000). So you could say my return is roughly 100%. The fellow who taught me how to do all this told me one time, "when it's this good, don't worry about figuring your return, just say it's good enough". :happy


One thing to remember, however - it's not too uncommon that when people are looking foreclosure in the face, they may turn to a 'no-holds barred' mode and do things like strip copper piping out to sell for scrap, rip appliances out to sell (not caring if they damage cabinetry or walls), and otherwise not give a damn on how they take care of the house, since they're going to be kicked out and loose it all in a few weeks. If substantial repairs are required to bring the property back to a rentable/sellable condition and you have to hire contractors to fix it, depending on the home value it can quickly turn a 60% LTV loan in a property into a 100% LTV once you add in the repair cost.

It's true that not every borrower facing foreclosure resorts to these tactics - but be aware that it can and does happen with more than just a handful of borrowers.


Thank you for your post MooreBonds. Actually, the buyers did do some of that although not to that degree. They took the dish washer and the range which I had to replace. Otherwise, I only had a few minor repairs to do. The thing I have to remember is not get too bogged down with the "what if this or that bad thing happens", to the point where I don't do anything. My experience has been that most of the time these things never happen. I could invest a lump sum in the total stock market index and shortly thereafter lose forty or fifty percent of it. Does that mean I shouldn't do it? There is risk in everything. With the house I foreclosed on, I had already received $36,000. after expenses and I only put in $45,000. so you could say I only had $9,000. in it. They would have to do a lot of damage for me to lose any money.

Edited to add:
I think knowledge has a lot to do with risk and return. If I invest in stocks and try to outperform the market, there are a lot of people who know more than I do. The best thing I can do in that case is just take what the market gives me with the least amount of cost. When I invest in mortgages, I know more than most of the people I am dealing with. In that case, I will very likely come out on top. Also, I think my risk is mitigated because of what I know. But I know I will never have all the answers. I can analyze a situation from now on, but there comes a time when I have to just do it. It's like playing stud poker. You may have to change your strategy as the hand plays out, but you play the hand you are delt the best you can.

So, I may look at a mortgage investment and say that doesn't look like much risk to me. Someone who is not knowledgeable about this kind of investment might say, this looks too risky to me.
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