If you have ever invested or are an investor, it is likely you have encountered the problems of too little returns, uncertainty as to what the rate of interest will be –because of fluctuations on the economy, putting too much money at risk, the need for cash flow to pay for bills & expenses or tying capital for a long period of time at low returns therefore getting a net loss due to the cost of living a.k.a. inflation.
Security is usually the trade-off. In other words the price for security we pay is enormous! For example, if you have $100,000 on a bank CD, you are losing at least $2,000 per year (at the time of this writing). In other words it costs us 2% to pay someone else to keep the money in a safe place.
Security should be part of anyone’s strategy & portfolio, however your assets should be providing you a net surplus NOT a net loss, even when you take into account the price you have to pay for security.
What if you could have multiple checks coming to you every month, for years to come? What if these checks came from investments that were fully collateralized (meaning fully backed by an asset as opposed to unsecured) where you knew exactly what the rate of return would be and in addition where you had 100% control of the investment?
Years ago I actually met a very successful lady in Dallas, Texas, who did just that. I had a client come to my office last week who decided to undertake this path too.
I’ll give you an example: If you buy a house for $250,000 at 6% interest over 30 years, you end up paying to the bank a total of $539,595, that’s a total rate of return, to the Bank, of 216%!
The latter was not a typo, I will write it in English so there is no confusion: the bank gets a total rate of return of two hundred and sixteen percent.
This means the Bank gets 2.16 times the price of the house. In other words, you pay the bank a monthly payment of $1,500 instead of $694.
This is just at 6%, at 8% (which up until recently was an OK rate and rates are going back up) the total returns jumps to 264% -you end up paying a total of $660,388.
Instead of you having to make the other guy’s 216% return, why don’t YOU make that kind of money? In other words, why be at the paying end of this equation when you can be at the receiving end of the money?
In today’s market (and also before in the “good times”) there are a lot of companies who are involved in the business of real estate, examples are: developers, hard money lenders, buyers, investment pools, etc… Most of these people and companies use other people’s moneys, or OPM.
Their proposition is very simple, they use your money to buy a piece of real estate, you get a first deed of trust and usually you get around 11% per year.
This basically means that you are the bank and your collateral is the property. It is called first trust deed since you are the first in line should the property be foreclosed. There may be other people who lent on this property on 2nd position, this means they could get paid after you are paid.
You don’t have to worry about the upkeep of the property or the expenses and time associated with its administration, all that is done by the Company.
This is not a totally passive activity. You need to do some research, especially in the area of ensuring that you are lending on a house which if sold, would generate enough capital to pay you back. Companies that specialize in this type of business do provide you with information which you can independently validate.
If you are going to make about 11%, which at the time of this writing is about seven times more than the CD rate, it is not so bad that you do a little homework.
Another way to apply this concept is to buy a property, ideally all cash, and then you become the bank to the buyer. Legally speaking there are a few ways to achieve this, however the principle is the same. This is called owner financing and there are investors who specialize in this area.
I see investors buying up residential real estate and then renting it. The results are endless headaches and problems associated with having tenants. I have seen these problems and lived them first hand! All for little to almost no cash flow, in other words a lot of work for little money at the end of the month. There is a lot that can be said about this subject and due to the limitations of space in this article I cannot cover them all, however, a much better alternative is to SELL the property rather than RENT it, but YOU get to finance the sale!
If you don’t have enough capital to invest in buying a property for cash, you could still get a very high return by investing with a real estate company and becoming a first trust deed owner.
I hope this article has motivated your curiosity to dig a little more into this subject. There are many books written about this, in particular the Rich Dad Poor Dad series –which are very down to earth. I have seen both, the investing in first trust deeds and being the banker on an owner financing type of a situation. The beauty of this type of investment is that you do have collateral which is typically worth more than what you invest, you get monthly regular payments and at 11% you are doubling your money every six and a half years!
To put this into perspective using our previous example, at 11% over 30 years on a $250,000 property you would receive a total of $857,091, that is…I hope you are sitting down, 343% total return! or 3.43 times what you originally lent!
Thank you for taking your time and reading this, I hope it has inspired you as it inspired me, specially today where we are faced with once in a generation opportunity!
