10% Safe, Passive Return, or, Why Work when you can invest?

A lot of what real estate “investors” talk about is not Investing it’s Work.

Now I am not opposed to work– God knows I’ve done a lot of it over the years. But remodeling a house so that you can sell it for more is NOT investing– its Working. Investing is putting money into something and getting money out. Even managing the remodeling on the typical fix and flip is not Investing (although it gets minimally closer) its still Work.

Front Facade croppedThe example I frequently use is that you could Invest by purchasing a CD at your local bank. The return won’t be that good but when it snows nobody is going to call you to say its your turn to shovel the sidewalk.  That is a passive investment.

So I have conversations all the time with Real Estate “Investors” who talk about their fantastic rates of Return On Investment on this project or that but they really are not telling the whole truth. First we would need to ask:

About work

  • How much of your time did you put into this transaction and how did you value your time. (if the answer to that question is 100′s of hours and they valued their time at zero then the investment rate of return is skewed by omitting an input that has considerable value. First subtract the value of that time at some reasonable rate and then we can talk about ROI

About RiskFacade

  • Are you counting your ROI on what you put down on on the total project? Lots of people want to calculate their return based on the 10% (more or less) down that they put in to buy the house. But if you signed personally on that loan then (in my opinion) you have to count the entire loan amount as if it were all your capital–  thus reducing your ROI to a much smaller number.

Now after those corrections we can have a conversation about something like what I call a Risk Adjusted Return On Investment.

Now for many Real Estate Investors the fact that they can trade Work for Dollars is just fine and a lot of what this website is about is helping those Investors do just that.

The reason I am making these points is that I happen to have Safe, passive 10% annual return investments available.

What Makes them Passive?

Ultimately the answer is that I am doing all the work. Its not that the work isn’t there– (there is always work) so the trick is to get someone else to do it. That’s where I come in. And why do I do this work? For the money. Essentially I am getting paid everything which the investment earns above the 10% we are paying to the investor. Those returns are considerable but they are somewhat distant. Most of the money for the first 5 years are going to the mortgage investor– I start getting paid only after you are paid off.

In the meantime a check shows up in your mailbox each month (or an automatic transfer to your bank account) automatically. Without you doing any work. That is a passive vehicle.

What makes them Safe?

First there is no leverage. The investor is loaning money to one of my companies– the loan is secured by a first mortgage position on a condominium sold on a 30 year land contract.There is no other debt so if the property makes any money you are first in line to collect that money.

living roomSecond is cash flow. When I bought these condos they did not have occupants, there was no cash flow. I did the work– I found contract buyers. Those buyers are under contract to make monthly payments for the next 30 years.  I am not expecting you to invest for the whole 30 year period– only the first 3 to 10 years (your choice of period). I get paid on the cash flow AFTER you get paid.

Third there is a reserve account. At the time that the mortgage closes we establish a 6 month payment reserve. This reserve guarantees that the payment will be made in the event that the land contract buyer defaults. 6 months would appear to be an adequate period of time to evict the land contract buyer and put a replacement buyer in place.

Third there is a quick reduction in principal. These loans are available in periods from three to ten years, whatever matches your investing needs. (Though it should be said that on less than  five years the loan is interest only– other than that these are amortizing loans).

Third there is title insurance and a first mortgage. So even if I were to flake out or step in front of a bus there is a basis for the investor to get his return without me. You have collateral.

Feel free to hit “contact us” and ask for more information.

 

3 thoughts on “10% Safe, Passive Return, or, Why Work when you can invest?

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    Reply
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