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Don't Be An Investment Fish Don't Be An Investment Fish

07-01-2009 , 10:49 AM
I posted this in June **** thread just to see if there was interest and there is, so please do not delete as the intended audience is all MSNL & HSNL and I think many of them will be quite interested in this.

First, I'll introduce myself. I'm foxfox1 and have been a regular on Stars/FTP for a few years now. Many of you will know me or at least recognize my name.

I know many of you keep your cash/investments in a money market/funds/stocks or even some of you keep it in a no-or-low interest bearing bank account. There's a much better option. It is real estate. I'm not talking about investment properties, rentals, or rehabs. That takes work and is a active form of income. The focus should be on creating passive income. This is where I would like to come in.

I have gotten involved with what is called "trust deed investments." The basic idea is that a borrower needs money for whatever reason. They have poor credit, bad circumstances, or are in need of quick cash, so they are unable to acquire it through conventional means. And if you do not follow the real estate/lending markets, this is a very hard time to get a loan. So, this person needs collateral to get this loan and they put up their laundromat, secondary residence, automobile dealership, etc. The idea is any type of real estate that doesn't have an existing lien against it (proven by a title search). I then lend them some amount (always less than 50% of the tax value of the collateralized property.) In exchange they pay a higher than average interest rate because they are a riskier borrower. I'll illustrate this with a few examples of deals I have actually done.

Example A:

Mr. & Mrs. Jones just inherited a house. Tax value is $90k. They currently rent and have combined income of $3k monthly. Their current rent expense is $800/mo. The house they inherited needs some minor repairs and they have debt issues because of some health issues they've had and a divorce one of them went through a few years ago that they are still finacially affected by. All said they need 25k to move into the house. They can't get conventional financing due to poor credit because of said divorce. I lent them the 25k charging 12% + 4 points up front. Points are an origination fee. So for 25k, 4 points (4 %) would be 1k. So, they don't actually get 25k, they get 25k - 1k in points is 24k and then they pay me interest of 12% on the 25k (not the 24k) because the principal amount of the note is 25k. So, because they likely will not be able to repair their credit, I decided to amortize their note and lower their "rent" payment. They went from paying $800/mo in rent to paying $600/mo in mortgage. This is good for two reasons. First, it gives them more disposeable income monthly. Second, it preserves the principal for a longer time period netting me more interest income. So, what happens is they pay for 12 months. If at the end of 12 months, they can not pay the balloon, they can extend the note at another 4 points. So, I will be making >16% on this 25k which after amortization and principal pay down will be decreasing exponentially through the life of the note until about month 52 at which point they've paid off. For those of you doing the math, 12% on 25k is $250/mo. So that means $350/mo goes towards principal. The interest payment reduces gradually and the principal payback increases gradually until pay off.

INVESTMENT: 24k
PROFIT: amortized to be > 16%


Example B:

A builder, Bob, has a spec house and he needs 35k to finish some deck & HVAC work. The property is insured for 400k.
So, the LTV (loan-to-value) on this one is less than 10% which means I have a VERY secure position. Fannie mae will not do construction loans and they won't loan because it's not considered a residence until it has central air (or something like that). So construction needs to be completed before he can qualify for conventional financing. So, he gets a 6 month note. He paid 5 points (higher points because it's a shorter term note and I'm not going through this work just to make a couple thousand) and pays 15% until he refi's. If after 6 months, he can't do either, I get the property. So, with this deal, even if he pays off at month 5, I've made $1,750 (5 points) plus 15% times 5 months of $35,000 = $2,187.5. Because his primary exit strategy is a refi, we do interest only payments. So, for you ROI guys, we lent out $33,250 and we made (1,750 + 2,187.5) $3,937.5 is 11.84% BUT that's only for 5 months of the year. So 11.84% divided by 5 * 12 = 28.4% return ANNUALIZED.
That's the best part about points. IF YOU ALWAYS KEEP YOUR MONEY ACTIVE, SHORT TERM NOTES YIELD HIGHER RETURNS WHEN YOU CHARGE POINTS UP FRONT.

INVESTMENT: $33,250
PROFIT: $3,937.50
ANNUALIZED ROI: 28.4%

Example C:

Some investor/rehab guy needs 43k to buy and repair some doublewide. He's ALREADY got the property sold for 75k, he just needs to buy, fix, and hold the property for 3 months (seasoning laws) before he can resell.This is another 6 month note. 5 points up front and 15% interest rate, payments interest only of $537.5 per month. 5 points of 43k is $2,150. So 6 months times $537.5 + $2,150 = $5,375 on $40,850. Double $5,375 to annualize the return is $10,750 and you've got a 26.3% return.

INVESTMENT: $40,850
PROFIT: $5,375
ANNUALIZED ROI: 26.3%

Example D:

A couple has a residence they own free and clear valued at 721k. They need 250k in cash, but their credit sucks. I have a very secure position, so I only charge 12% + 4 points. Day of closing I send out 240k. One year later, I get my 250k + 12% times 250k is $30,000. So, I make $40,000 on a $240,000 outlay is a 16.7% return.

INVESTMENT: $240,000
PROFIT: $40k
ANNUALIZED ROI: 16.7%

And the great part is, if any of these people default, the note is secured by their property, so I would then own the property. Foreclosure take a few months, but if you look at these examples, I doubt you'd mind waiting a few months to increase your return by a couple hundred percent or in some cases a thousand percent. That said, I have not had any issues with any of my borrowers except for one late payment, but that's just an extra $40 (or whatever late fee is in the contract) in my pocket.

That leads me to this part. I have made a lot of contacts where I live and have a lot of opportunities similar to these, but not enough money, so I'm making this opportunity available to you. I've talked to my real estate attorney and she says I can set up a partnership where everybody buys shares/equity and I invest the money and everybody gets their cut whenever they want it. They can keep rolling it over or they can get distributions. They would get a K-1 at the end of the year for tax purposes as being a member of a partnership.

Why would I do this?
1. If I am known as a guy in town who can make this stuff happen quickly, then I get a lot more opportunities and if you remember my point above, the more you work your money, the higher your annualized return. I don't like telling a broker, "Sorry, I'm tapped out until mid-August at which point I'll have a note come due", because I might be less likely to hear back from that broker.
2. As manager of this "investment pool/fund", I would get a % off the top. Somewhere between 10 - 25% of net profit. Not really sure how to structure this because I don't know the fees involved with setting up the partnership and having taxes prepared for it. This would obviously be figured out before you decided anything.

WORST CASE SCENARIO:

12% annual return - 25% pool fee would be 9% annual return, but if you look at my examples, it's likely to be higher. I imagine there's at least a handful of you that can't even come close to a 9% return.

MY CREDIBILITY:

First, all of this would be done through an attorney, so that protects you and protects me. Second, I have done tens of thousands of dollars of exchanges with the following people no problems at all. Third, I will also be a partner and have my money in on all of the deals. I only accept deals where I have an extremely secure position. So, you would never be involved in a deal that I wouldn't be involved in.

River Boat King
Legally Blind
WCG|Rider
Adam001
KingsofCards
DF_Newb
DogIsHead

and probably a few more that I can't think of.


FINALLY, THE BEST PART OF IT IS, IT IS POSSIBLE TO DO THIS WITHOUT PAYING ANY TAXES. You just make all of your investments through your SEP-IRA through a self-directed IRA trustee (I hope you all have retirement plans) where you can invest in ANYTHING you want to.

Feel free to ask me any questions in the thread. And if you're seriously interested, please send a PM.
07-01-2009 , 11:56 AM
i dunno about anything guaranteeing a 12% annual return, call me skeptical
07-01-2009 , 12:15 PM
ok. i'd like to see hands from anyone who can beat a 6% return.
07-01-2009 , 12:19 PM
Quote:
Originally Posted by foxfox1
ok. i'd like to see hands from anyone who can beat a 6% return.
*raises hand*

i beat that by playing poker, lol
07-01-2009 , 12:19 PM
I'm getting a lot of questions about how to get money to me, so I'll answer that here.
This will be done through a partnership. So all partners need to make a contribution to a partnership. I can not write a check from foxfox1 poker account to "2p2 Lending Group" in your name. This is the time to possibly create an LLC or a self-directed IRA account and invest through that.
07-01-2009 , 12:20 PM
Quote:
Originally Posted by dragonystic
*raises hand*

i beat that by playing poker, lol
so, you use your entire roll to play poker? sounds responsible.
07-01-2009 , 12:21 PM
Quote:
Originally Posted by foxfox1
so, you use your entire roll to play poker? sounds responsible.
so you use your entire roll to invest?

im confused why you would make such an assumption.
07-01-2009 , 12:26 PM
Go read "Fooled by randomness"
07-01-2009 , 12:32 PM
ok, i'll rephrase. is 100% of your money being used to play poker?
07-01-2009 , 12:37 PM
If banks wont lend people money, theres probably a time trialed good reason for it. These give good returns because they are high risk, good luck when you come across your first failure trying to sort that one out. It wont be pleasant dragging old couples and wrecked individuals through courts stripping them of everything they own.

Also, forgive me if I am completely wrong but this just sounds totally scame material. Send you money to get an amazing return. Hm. Maybe I'm wrong, but why not keep this idea for yourself and profit forever?

If the reason you want more money is to leverage then why not go to a bank.

Maybe im wrong idk. GL

Everyone reading: Number 1 rule of investment, don't invest in something you don't understand.
07-01-2009 , 12:46 PM
Quote:
Originally Posted by technologic
i dunno about anything guaranteeing a 12% annual return, call me skeptical
this
07-01-2009 , 12:52 PM
nice title, we're "missing out" i guess
07-01-2009 , 12:53 PM
07-01-2009 , 12:54 PM
Making loans to high credit-risk individuals?? Nothing in the history of the world has ever gone wrong with that business model!!! Where do I sign? Ah, forget it, just let me send you some cash. I WANT IN NOW!!!!!!!!!!!!

This post does not belong on 2+2. Maaaaaaaybe in the business/investing forum, but even that's debatable.

If all you're saying is that you don't have enough money to make this happen with 100% of your own funds, then go get a loan. In fact, I know a guy who will loan you $ even if your credit sucks!!! Oh wait...
07-01-2009 , 12:56 PM
Is this 100% risk free?
07-01-2009 , 12:57 PM
Alright, maybe it did sound like a sales pitch, but if you boil it down, that's what I'm doing, I'm selling a service.

Why don't I just do it for myself? I have and I'm out of money. My IRA is completely drained until a note pays off. My wife's IRA is completely drained and I've obliterated my savings accounts and liquidated all of my stocks/funds for this. I don't know about any of you, but I do not want to play poker for the rest of my life.

I read an interview of Dan Harrington a few years ago and the idea was: there are dozens of young kids making a substantial living at poker who just stake and take piece of their friends in tournaments to avoid paying taxes. He then said something like if these kids applied their intelligience to something outside of poker, they could see results that far exceeded anything they made with poker. So, for any of the naysayers instead of just being ignorant ("if you don't understand something, don't invest in it") you should make an effort to understand it.

Another point that you guys don't seem to understand is... the note is secured by real estate. If your parents have a 200k house and they only owe 100k on the house and all the sudden they're unemployed tomorrow and are losing their home, do you think they'd have any problems selling it for 100k and at least paying off the note. So, if that's the case where we would be the bank, where is the risk?

If you do consider it high risk, than consider it high risk as part of a diversified portfolio in which you would allocate some percent to various forms of investing.

I'd prefer to keep this thread to constructive conversation. If you don't understand, than ask a question, but please just don't start talking ****.

Last edited by foxfox1; 07-01-2009 at 01:02 PM.
07-01-2009 , 12:58 PM
This is awesome, thanks for the play by play on personal investments.
07-01-2009 , 12:58 PM
Quote:
Originally Posted by foxfox1
Example C:

Some investor/rehab guy needs 43k to buy and repair some doublewide. He's ALREADY got the property sold for 75k, he just needs to buy, fix, and hold the property for 3 months (seasoning laws) before he can resell.
this scenario seems dubious to me.
07-01-2009 , 01:21 PM
wtf is this crap about... I hope there's not one 2+2er that could fall for this...
07-01-2009 , 01:25 PM
seems to me the madoff sentence was still too soft to scare any imitators.
07-01-2009 , 01:25 PM
Quote:
Originally Posted by foxfox1

Why don't I just do it for myself? I have and I'm out of money. My IRA is completely drained until a note pays off. My wife's IRA is completely drained and I've obliterated my savings accounts and liquidated all of my stocks/funds for this.
lol diversification

seriously though, it surprises me how many great poker players are life fish.

Last edited by philipsaurus; 07-01-2009 at 01:32 PM.
07-01-2009 , 01:36 PM
fox,

i'm not gonna come in here and point at you and laugh. I geniuinely don't understand a couple of things:

- Some of your investments seem to be "risk free" as you have a claim to the deed which is worth more than the loan?

If this is the case then:

A. Why do you have to (or how do you get away with) charging such a high interest rate?
B. Why aren't banks just doing what you're doing given they have more cash and could undercut the rate you offer?
07-01-2009 , 01:46 PM
Quote:
Originally Posted by Moonshine
fox,

i'm not gonna come in here and point at you and laugh. I geniuinely don't understand a couple of things:

- Some of your investments seem to be "risk free" as you have a claim to the deed which is worth more than the loan?

If this is the case then:

A. Why do you have to (or how do you get away with) charging such a high interest rate?
B. Why aren't banks just doing what you're doing given they have more cash and could undercut the rate you offer?
Fannie Mae has put very strict lending guidelines. Bank's DO NOT set lending criteria because they all sell loans to larger underwriters. These underwriters do not have time to look at all loans on a case by case basis, so they set full proof guidelines. Minimum credit score is 620. Debt-ratio has to be less than 28% and some others that I do not know. Many people can not meet these. But let's omit the people that have poor credit. Investors are only ALLOWED to have 4 investment properties. So, how do they get financing? They've found a fifth deal where the numbers make sense for them to do a rehab and so they want to do it. They can't go to a bank, so they need to find unconventional financing. So, they don't look at me as a lender, I'm sort of a business partner in the sense that if they feel they can make 30k on a deal, but they can't get financing, do they just walk away from 30k or do they pay me 6k so they can make 24k? So, they're just sacrificing a portion of their profit, so they can make ANY amount of money on it. If they don't get it, somebody else will.

As to why do I HAVE to charge a high interest rate. I don't. But I can. And again, I look at their numbers and their situation and if I see they're going to make some money, I feel me getting a more than 10% return to allow them to make any money at all is fine.

As for the people with low credit -- what about the guy who's going to be a renter for the rest of his life because he always misses credit card payments. He always pays them, but never on time. So, he always has ****ty credit scores. I'm not lending to people that I know can't come through. I always get 2 years worth of bank statements and letters from landlords and anything else I need to feel like I'll be OK.
07-01-2009 , 01:49 PM
I guess the reason this rubs us in the wrong way is cuz this is the kind of thing you keep to yourself and maybe propose it to close friends, wtf at posting this in this forum as a business proposal. It would be fine to post it as a story in BFI or something.
07-01-2009 , 01:55 PM
because all my close friends have maybe 10-20k to their name. and i'm not asking them to put up 1/4 - 1/8 of their net worth into anything. I guess I'm appealling to those intelligient enough to recognize it at as an investment worthy of consideration and many have via PM. and if you can gamble a buyin preflop for a coin flip where your edge is <4%, but you can't even give this a chance, then you're probably not the type of person to get involved with. investing is about risk vs reward. and if you set your criteria correctly, you can reduce risk significantly.
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