Return on $100,000 in a First Position Trust Deed

My partners Michael and Steven have been talking with me a lot lately about finding people who want to invest in first position trust deeds. We think that there are a lot of people who are in retirement that are looking for income and want a reasonably secure place for their capital. Wall Street is no longer seen as safe, regardless of its short-term comeback during mid-2009.

Where Does the Monthly Income Come From?

For many retirees that is the main question. Their stock portfolio is half of what it was, so they can't spend capital. Michael talks to people all the time that are putting their money into CD's at 1-2% interest, which isn't even keeping up with inflation. Even if inflation is being matched, $1,000,000 in CD's at 2% only pays $20,000 per year! What if you only had $100,000? Is $2,000 a year (about $167/month) really enough to supplement an income?

What if that same $100,000 was lent against a single family, income-producing rental home at 6% annual interest? That would be a $6,000 per year income stream, or $500 per month, 3 times the amount of the CD interest payment.

But What About Security?

After the income stream the question comes up about the current state of the banks and all of the bad loans that have been done and how does someone know that the loan is secured? There are different parts to that answer:

• The property is an INCOME PRODUCING property. Make sure that the real estate investor who borrows the money has a good track record and tenants' rent pays the mortgage. If the tenants stop paying, the real estate investor finds new ones. It is part of the business plan for single family homes.
• The loan is secured by a first-position trust deed. If needed, you can foreclose on the real estate investor. You will then own the property or you can collect the rents yourself.
• You can use a third party escrow service receive the payment from the tenant(s) The escrow service will then send you your payment first, and then the balance to the real estate investor.
• Local real estate investors know property values. The values are based on rents, not on arbitrary market demand. When demand to purchase houses goes down, rent demands go up. Your loan is protected by rents much more than by the property value at any given point in time.
• This is not something new. Do a Google search on private mortgages and see all of the resources on the web. Web sites, books, companies that broker private mortgages.

The Investment That Keeps on Paying

What about comparing a $100,000 cash gift to to heirs vs. leaving a private mortgage behind? How many recipients of that kind of gift would have the good sense and wisdom to invest it? How many would spend it on a depreciating luxury item like a car, boat, or ATV's for the whole family, or an outright expense like a grand vacation?

If a private mortgage of 10, 20, or 30 years survives the lender, the loan and monthly payments goes to the heirs. It is an inheritance that keeps on giving.

What Are Your Thoughts

Have you used a private mortgage? Do you know anyone who has ever lent on a private mortgage? Do you think that they are safe and secure? Any helpful hints for using private mortgages? Let me know.

Preservation of Capital

Have you talked to a stock market investor lately? Are they a "half" or a "third"? Depending on who you are talking to, they are down either 50% or 66%.

Have you talked to a home owner in a luxury neighborhood lately? How much are they down? 10%, 20%, 50%?

Both investments are risk-based, so what about low-risk investments?

Bank accounts are paying 1%, less than the rate of inflation- which means your investment is going backwards each year.

Fixed annuities have a reasonable rate of return, maybe 3-5%, but it's a retirement product and it puts you in bed with the government. Want to cash it out before age 55 1/2? Take a penalty from the IRS- it's an early withdrawal.

You see the issue? Where do you put capital?

The Moderately-Priced, Single Family Rental House

Let's look at a single family house investment on a cash basis only. If you invest cash $100,000 in a single family home and the rent is $1,000, that's $12,000 per year. With no expenses, you have a 12% annual return on your investment. With vacancies, taxes, insurance and repairs, you might have 50% expenses. Your cash flow is now $6,000 per year. That's a 6% return on your investment. Year after year, with the return going up as rents go up.

Can the house go away? Disappear from a rumor about the economy? Be stolen? The answer is no. It can burn down, but then it will be replaced by insurance. Of course, a chunk of the value is the land, and that's not going anywhere.

So, the moderately priced single family home's value is supported by the rent and cash flow from the property. There is an intrinsic value to the property from the rent. What is that intrinsic value? It all depends on the economic times and the return an investor is looking for.

Additional Investment Value

When you add to the equation the tax benefits of a rental property, the investment is even higher. If you leverage your capital and borrow some of the investment, the return on your cash continues to grow.

But this is not about capital growth or astronomical returns. This is about preserving your capital. An investment that pays year after year, while the value stays in place.

The Hidden Profits in Real Estate

I read a great post at investorsworkshops.com from a good friend and great investor, Spencer Erickson. Spencer is a CPA with creativity, personality, and knows creative real estate. His wife, Brittney is also a CPA and runs an accounting firm that specializes in working with real estate investors. Check out precisionaccountservices.com to find a great service for a price real estate investors can afford.

Spencer's article was so good that I asked for permission to post it. Here it is:

I’ve been doing some thinking about the hidden profits to be enjoyed by the brave-soled real estate investor. Often it feels like I’ll have a month where something goes wrong (one of my tenants abandons the house and leaves all there worthless crap without paying rent). At times like these the cash flow might not work out for the month, but I find peace in hidden profits. Let me explain:

There are at least three common ways that real estate investors enjoy profits that don’t show up immediately in cash flow: amortization, appreciation, and tax benefit.

Amortization is my personal favorite of the hidden profits, because it is guaranteed to make the long-term real estate investor very wealthy. True, it might take 30 years, but start early and avoid the temptation to take out those second mortgages when you get a little equity. If you are tempted, stop, think, and use your creativity to make even more money while preserving your equity.

Appreciation is a fun one, but don’t bet the farm on it. I’m well aware that many people made their millions based on real estate appreciation, and I’m hoping that our friend appreciation kicks in a little for me too. Remember that appreciation is a double edged sword; if you never plan to leave the real estate industry, over the long run it might hurt you on purchases as much as it helps you sales. I know that all of us feel like we have a good idea about what prices are going to do, and we are probably right, but there is a chance that that feeling is nothing but indigestion.

Now the boring one: the tax benefit associated with owning real estate can be the best of all the hidden profits. I’m not sure why Uncle Sam is letting us take depreciation on assets that typically appreciate, but we might as well take advantage of it. In my book Heaven is that wonderful place where you realize a positive cash flow and have negative taxable income. If you are doing it right, depreciation will provide this heaven on earth. If you are not phased out (and if you are phased out, I don’t feel sorry for you) you can take up to $25,000/year of rental real estate loss against other ordinary income. At current rates, under that scenario, not only is all of your rental income tax deferred, but you may be able to put a nice check in your pocket each year at tax time (and if you have the discipline to put that money back into real estate, you actually deserve to be rich).

Now before I hear the criticism, let me tell you all that I know that cash flow is king. These are just a few ideas to lift your spirits when king cash flow is visiting someone else.

Thanks ya’ll for reading. I’d love to see some discussion/examples go back and forth on any of these topics. Investors Workshops has been great to provide the site, but much of the content is only what we make of it.

Spencer

Tell me what you think about Spencer post and the hidden profits.

7.5 Reasons Cash is Power in Real Estate

OPM- Other people's money. One of the first things you learn about real estate- use Other People's Money. That's all fine and good, but have you every learned that Cash is King? And that when you are the King (or Queen), then you have power? So, Cash = King = POWER. How?

Let me tell you how CASH is POWER:

1. Cash Buys You TIme- Want to do more transactions? Use cash. Instead of waiting 2, 3, 4 weeks or more to wait for a bank to approve you for a loan, pay with cash today. How many more deals can you do if you are not waiting an extra 2-4 weeks per deal?

2. Cash Gives You Influence- Send out an e-mail (or tweet) letting your bird dogs and business associates know that you have $250,000 in the bank and that you are looking for great deals. Be ready to take action as the offers roll in.

3. Cash- Private Sellers Love It! Do you think a seller would prefer an offer contingent on financing, or cash? Duh. Will they take less for cash tomorrow than financing in a month or more that may or may not come through? YES!

4. Cash Towards Hard Money Loans- Hard money is expensive, right? Try coming in with a chunk of your own cash and negotiate terms. Clear Day Capital borrowers who drop from 75% LTV to 60% LTV reduce their costs of a loan by 1/3!

5. Cash Discounts from Vendors: EVERYONE takes cash discounts. Don't want to pay up front for incomplete work? Work with the title company that closes your transactions and have them hold the funds so the vendor knows that they're available. When the work is done, have the title company cut the check and have the vendor sign a lien waver.

6. Cash- Banks Want It! You'd think that banks would have enough cash, but they will cut deals for REO properties and short sales if they know there is cash to close immediately. Good luck trying to time a conventional loan with a short sale.

7. Cash Keeps You Out of Trouble: There will ALWAYS be unexpected expenses and unexpected delays in income. When you have cash reserves, your business can "whether the storm." Author Charles Givens, who wrote "Wealth Without Risk" put it simply: "A prolbem that you can solve by writing a check isn't a problem."

7.5 Cash Makes You Feel Good: Don't believe me? Try a couple of experiments:

Experiment 1. You have and extra $25,000 in your bank account. Close your eyes and think about how it makes you feel.

Experiment 2. Go to the bank and cash a check for $1,000 in $20 bills. Hold them, count them, feel them in your hands. How does it make you fell?

What If You Don't Have Cash?

Go find someone who does. Get a cash partner. Work with a hard money lender who can provide money fast. Set aside reserves from profits of each project. Keep building reserves until you get all the benefits of a cash buyer.

Do you have an expample of when cash got you a great deal? Post it and share.

Real Estate Social Networks- Preview the Next Wave

Want to see the next wave in social networking? Take at preview look at Clear Day Connect, the social network for people who are investing in Northern Utah real estate. Even if you are not targeting Utah, you need to take a look! Why? Here's 7.5 reasons:

1. Social Networking is here to stay and this is a new twist- target social networks.

2. Clear Day Connect is built on the SocialSam.com platform. Starting at $7.95 a month, anyone can start a social network.

3. The SocialSam.com platform allows you to monetize (get payed for!) social networking!

4. Clear Day Connect will have professional real estate investors, property managers, attorneys, and accountants ready to answer questions when in launches in the next 1-2 weeks.

5. You can provide valuable feedback about what you wouuld want to see in a real estate social network from the ground floor up.

6. Don't you wish you had been at the ground floor with Facebook or Twiiter? Here is the next potential platform.

7. There are at least two good articles to download for free right now and a half a dozen proffesionals to meet. YOU could even lead a forum if you ask nicely!

7.5 Visit Clear Day Connect because I'm asking nicely!! You can do me that favor, right???