by Brian Brady
Commercial Real Estate Finance Expert
Structured Debt and Equity
Licensed Real Estate Broker in AL, CA, and FL
Imagine a business with a 50% markup. No employees, no warehouses, some liability, and you can do it from the comfort of your own home. I’m not trying to introduce you to the hottest multi-level marketing craze nor am I trying to convince you to open a franchise.
I want to talk to you about becoming a buyer and seller of money. Mortgage money. I’m talking about the private mortgage marketplace.
Let me start off by showing you how to get the money you need. If you own a home with a bunch of equity (and many of you do), you have a lousy investment. Robert Ashby, President of Solid Rock Mortgage in Florida, tells us that home equity earns you nothing and may actually shrink over the next 6 months to 6 years (depending when your local market turns around). If your boss left a bunch of inventory in the warehouse and it was in danger of losing value, he’d be looking for another job in a few years. Turn that “dead” inventory into money producing inventory by borrowing against your home equity. You can do that for about 8% in today’s marketplace.
Disclaimer: The private mortgage as an investment, aka “trust deed” or asset-based lending (READ: hard money) is a very specialized market. I talked about this marketplace in Life As A Legal Loan Shark. I try to refer would be trust deed investors to the basics of trust deed investing and ultimately send them to the California Department of Real Estate explanation.
Now that we have the appropriate disclaimer out of the way, let’s talk about how you make money. Let’s secure you a HELOC for $225,000. We’re going to leave $25,000 in what Jeff Brown refers to as the Sominex account. Subprime borrowers are not always the best at paying the loans back in a timely manner so we want to have access to 10-12 months worth of payments in reserves. That way you can weather a storm.
Now, we’re going to have you invest the $200,000 in second trust deeds, with a minimum rate of 12%, on properties that have at least 30% in equity.
Why so much equity? Well, let’s assume it costs about 10% to dispose of the property should you need to liquidate the collateral through foreclosure. Let’s further assume that we may have a 10-15% drop in prices (I’m being VERY careful here, after all, it’s YOUR money). We think that 30% equity in the collateral you loan against will keep your investment safe.
So, you are borrowing money at 8% and lending it at 4% higher. By maintaining that margin, you’ll receive about $8,000 in profit. Yes, that profit is taxable so you may only keep $5,000 of that money. Keep something in mind, though: you’ve invested nothing. You merely leveraged the dead equity from your home into an active asset. Throw that five grand into a tax-deferred annuity each year and you’ll have over six figures in fifteen years. Little changes now can make a big difference later in life.
Is it that simple? Well, no. Start by finding a few good trust deed brokers, ask lots of questions, and read as much as you can about private mortgages.
RESOURCES:
The California Mortgage Association is a private mortgage trade association.
Dirt Law Blog is written by Julia Wei, Esq., a legal expert on California mortgage law.
SoCal Deeds is our website designed to educate private mortgage investors.
Robert Kerr says:
Brian, I’m sitting here, literally, mouth agape.
You didn’t explain how risky this is, especially in this market. “Some liability” doesn’t come close to accurately describing the danger.
I consider myself fairly adventurous but with the current atmosphere of defaults and foreclosures, I wouldn’t even consider private mortgage investing right now.
And by the looks of the subprime CDO market over the last few weeks, a lot of MBS investors share that view.
Buy at 8 sell at 12 sounds great, until it’s buy at 8, sell at 4 or 3 (or less), after a year or more of legal wranglings and expenses.
July 6, 2007 — 5:10 pm
Keith Jeppson says:
Bryan, you don’t usually make such direct solicitation? What’s your personal experience? Are you doing it? How many transactions? What’s your success rate been?
July 6, 2007 — 9:40 pm
Keith Jeppson says:
Brian, you don’t usually make such direct solicitation? What’s your personal experience? Are you doing it? How many transactions? What’s your success rate been?
July 6, 2007 — 9:40 pm
Brian Brady says:
This is NOT a solicitation for investors. Keith, I’ve closed about 100 private mortgage transactions over the past 5 years. I have personally invested in trust deeds in a qualified retirement plan.
The key component to a TD investment is the collateral valuation. We are very careful about our valuations (we try to determine value based on a 90-day sale)
Having said that, I disagree with Robert’s assessment. I believe that a 70 LTV protects our investors well in the current market.
More importantly, I am trying to demonstrate that there are options available to dead home equity. Trust deeds are an excellent alternative when placed by an experienced TD broker.
I’ll reiterate that this is NOT a solicitation; it is designed to educate investors. MBS investors and Hedge funds have flooded our market and driven yields to the lowest I’ve seen private money in years. We have more money to place than we can originate.
July 6, 2007 — 11:22 pm
David A Podgursky MBA says:
VERY straight forward presentation about how to make good money lending.
I think that Hard Money lenders get a bad rap but they fill a crucial need.
I have used them a few times on some commercial deals. I just created one recently on a commercial condo that would not have closed because the borrower was $40,000 short of funds.
I think that while bonds are taking a beating and stocks are mixed… we’ll see more people convert their IRAs to Self-Directed and form conglomerates to lend on mortgages.
Great piece
July 7, 2007 — 8:05 pm
Robert Kerr says:
It sure looks like a solicitation: “Make 50% on your money, low risk, and by the way, here’s my web site.”
And I completely disagre with the “dead equity” argument, but this is not the forum to hash that out.
July 8, 2007 — 9:34 am
Brian Brady says:
“It sure looks like a solicitation: “Make 50% on your money, low risk, and by the way, here’s my web site.”
We aren’t accepting new, inexperienced investors, Robert.
Perhaps I should post why home equity is a poor investment?
July 8, 2007 — 3:00 pm
Robert Kerr says:
“Perhaps I should post why home equity is a poor investment?”
Why not do a better job explaining the risks? “Some liability” is quite an understatement, Brian!
I’m sure you know a few stories of trust deed investors losing significant sums of money. Why not include just one of the milder examples in future pitches, as a caveat?
That would make the post appear objective, more like information and less like solicitation.
July 9, 2007 — 3:24 am
Marty Van Diest says:
Hard money lending is not to be entered into lightly. But it is a legitamate business and the people I know that do it, do well.
You have to be a hard nosed business person. Don’t be unrealistic in your evaluations of property and don’t be too soft hearted if you have to foreclose.
The only person I know that had a hard time with it did not want to foreclose when it was clear that the borrower did not intend to make the payments.
The foreclosure part is the reason I’m not interested. Usually these dead beats have little kids. It’s pretty hard for me to look these little kids in the eyes and tell them, “sorry, but because your parent is a loser I’m going to have to throw you and your toys out in the street.”
July 10, 2007 — 12:23 am
Brian Brady says:
“Why not include just one of the milder examples in future pitches, as a caveat?”
It’s not a pitch…but it came out that way. Well, I think I flubbed this one, folks. This one didn’t come out on the weblog the way it sounded in my head.
July 10, 2007 — 12:57 am
Eric says:
Brian, that honesty is appreciated 🙂 That’s what makes blogging so hard. Good bloggers can recognize and redefine though – so kudos 🙂
July 12, 2007 — 5:22 pm
Brian Brady says:
Thanks, Eric.
July 12, 2007 — 9:50 pm
Michael Cook says:
Brian,
How is hard money lending doing now? I would think with it being so hard to get funds that they would be doing well, but on the other hand with the values declining rapidly, they might not. Any insight?
December 28, 2007 — 10:55 am
Brian Brady says:
Hey Michael,
Happy New Year. The hard money business, in California, is alive and well. Lenders have cut LTVs to 60% and are extremelt hawkish on “ability to repay the loan”
December 28, 2007 — 12:17 pm