I was checking out my various IRAs the other day and was struck by how much better I feel about my self-directed IRA than I do my traditional (stock-based) IRAs. Most people’s retirement savings are invested in the stock market (including the majority of mine). But when I compare that with my self-directed IRA which is investing in hard money lending, I can’t help but notice how differently I feel about them.
Yes, stocks historically have risen over the long term. I know this. But I also am acutely aware that I have no control over the prices of the stocks I hold. About the only control I have is which stocks to buy and whether or not to reinvest any dividends they might pay. So each month, I check the value of my stock portfolio and I’m fairly detached from the experience. Stocks went up in value? Yay. But I know they could drop again tomorrow. Gains are transitory, at least in my mind. As the adage says, you’ve never made (or lost) money until you sell.
But with my hard-money lending IRA, I get a check each month for a couple hundred dollars. That’s real money I see coming in each month. It can’t be taken away again by a news report of a product recall, class action lawsuit, or some other random event outside my control. It’s cash in hand. Now the possibility exists that my loan might be defaulted on, but with the loan-to-value limits I use for my lending criteria, I know even if that happens, I’m still pretty well protected.
I know there is no such thing in investing as a sure thing or a guaranteed return, but the returns my HML-based IRA are generating feel much more real to me than my stock-based returns.
Showing posts with label hard money. Show all posts
Showing posts with label hard money. Show all posts
Where'd Everybody Go?
So 2011 is around the corner. It's been almost 7 years since I started this blog and investing in real estate. Back in the first couple of years of this blog, the real estate bubble had yet to burst and people everywhere were getting into flipping properties. There were a regular group of people that used to blog on their own and leave comments on this blog. I got to thinking about what happened to those people and what they might be doing today. I went back through some of my earliest posts, found the people who used to comment a lot and tried to see if I could find them today. Truthfully, I didn't search too hard. I'm not looking to actually contact these people or anything. I was just curious to see if they were still blogging and still in real estate investing. It's possible these people are still doing that, but using different names or blogs, but it seems most have moved on.
Trish#1 - Trish ran the blog Building An Empire, which is no longer around. She lived in Oklahoma and was purchasing and rehabbing properties she bought at foreclosure auctions. I actually bought a house from her, which didn't turn out too well. (In fact, it was the only investment property I lost money on - which was entirely my fault.) Last I heard of her, sometime back in 2007, she had started working for a property management company.
Seattle Eric - Used to run the blog seattlerei.blogspot.com, which is now defunct. I'm not sure if I'm remembering correctly, but he might have left real estate investing to become a Realtor. I know one of the bloggers I followed in the Seattle area went that route.
BGInvestor - a fellow RE investor in Arizona. He ran the blog The Life And Times Of An Arizona Investor, which is still up, but hasn't been updated since 2006. His last entry said he was starting a new blog with a focus on real estate investing education, but that blog doesn't exist anymore.
Erin Morgan - aka PRLinkBiz. I met her in person back in 2006 at a local get together of people who were active on Robert Kiyosaki's RichDad.com forums. She obtained some infamy from her involvement with Casey Serin, a clueless wanna-be real estate investor. She was also part of the No Limit Ladies website, whose last entry is from March, 2009. This site was run by a couple of different women though, and I think Erin stopped posting there years earlier.
Savvy Saver - although not a real estate investor, she did follow my blog and commented frequently. She runs an eponymous blog that is still operating and focuses on personal finance.
Kenric - another Arizona resident I met at the previously mentioned Rich Dad get together. He has shifted his focus from real estate investing to creating and running internet businesses. He still actively posts on his blog Live Learn Invest.
Les - my partner in real estate investing, whom I also met at the Rich Dad meeting, although we had corresponded prior to that. He lives in Northern California. He never had a blog and I found him mainly though his postings on the discussion forums at richdad.com. I haven't been there in ages, so I don't know if he's still active there or not. He is still very much active in real estate investing, mainly as a hard money lender, although he and his wife do buy and rehab foreclosures now and then. He was a mortgage broker prior to becoming a full time real estate investor, so he was involved in real estate before the bubble started.
Steve - yet another local real estate investor. He invests in apartment complexes and it's through him that I found the apartment complex in Houston that we are both invested in. He never blogged, but did post somewhat frequently on the Rich Dad forums. Again, I don't know if he still does. He is still active in real estate investing.
So in looking back, it seems many people who got involved in real estate back in the bubble have now left. Not surprising. If people were looking for a quick or easy buck, they're not going to stick around when things head south. But I think the people that took Kiyosaki's point to heart - that your money needs to work for you and not the other way around - are still going strong. It's true, my focus has shifted more from rehabbing properties to doing more hard money lending, but I still believe in the security of real estate and its power to generate passive income. Kenric took what he learned at the get together (where someone made a presentation on internet businesses) to set up businesses that run 24 hours a day with or without him (although he has shifted lately from using drop shippers to fulfilling and shipping orders himself, so he is moving away from the truly passive concept). He took to heart another of Kiyosaki's principles - build businesses that can be sold.
I wonder if any of those people that have disappeared still take to heart the concept of passive income or if they gave it up when they gave up real estate and went back to living paycheck to paycheck? I personally no longer follow Kiyosaki or read his books - I feel he's simply repeating the same thing over and over now. I do credit him for opening my eyes to the power of passive income and for changing how I look at spending my money.
Trish#1 - Trish ran the blog Building An Empire, which is no longer around. She lived in Oklahoma and was purchasing and rehabbing properties she bought at foreclosure auctions. I actually bought a house from her, which didn't turn out too well. (In fact, it was the only investment property I lost money on - which was entirely my fault.) Last I heard of her, sometime back in 2007, she had started working for a property management company.
Seattle Eric - Used to run the blog seattlerei.blogspot.com, which is now defunct. I'm not sure if I'm remembering correctly, but he might have left real estate investing to become a Realtor. I know one of the bloggers I followed in the Seattle area went that route.
BGInvestor - a fellow RE investor in Arizona. He ran the blog The Life And Times Of An Arizona Investor, which is still up, but hasn't been updated since 2006. His last entry said he was starting a new blog with a focus on real estate investing education, but that blog doesn't exist anymore.
Erin Morgan - aka PRLinkBiz. I met her in person back in 2006 at a local get together of people who were active on Robert Kiyosaki's RichDad.com forums. She obtained some infamy from her involvement with Casey Serin, a clueless wanna-be real estate investor. She was also part of the No Limit Ladies website, whose last entry is from March, 2009. This site was run by a couple of different women though, and I think Erin stopped posting there years earlier.
Savvy Saver - although not a real estate investor, she did follow my blog and commented frequently. She runs an eponymous blog that is still operating and focuses on personal finance.
Kenric - another Arizona resident I met at the previously mentioned Rich Dad get together. He has shifted his focus from real estate investing to creating and running internet businesses. He still actively posts on his blog Live Learn Invest.
Les - my partner in real estate investing, whom I also met at the Rich Dad meeting, although we had corresponded prior to that. He lives in Northern California. He never had a blog and I found him mainly though his postings on the discussion forums at richdad.com. I haven't been there in ages, so I don't know if he's still active there or not. He is still very much active in real estate investing, mainly as a hard money lender, although he and his wife do buy and rehab foreclosures now and then. He was a mortgage broker prior to becoming a full time real estate investor, so he was involved in real estate before the bubble started.
Steve - yet another local real estate investor. He invests in apartment complexes and it's through him that I found the apartment complex in Houston that we are both invested in. He never blogged, but did post somewhat frequently on the Rich Dad forums. Again, I don't know if he still does. He is still active in real estate investing.
So in looking back, it seems many people who got involved in real estate back in the bubble have now left. Not surprising. If people were looking for a quick or easy buck, they're not going to stick around when things head south. But I think the people that took Kiyosaki's point to heart - that your money needs to work for you and not the other way around - are still going strong. It's true, my focus has shifted more from rehabbing properties to doing more hard money lending, but I still believe in the security of real estate and its power to generate passive income. Kenric took what he learned at the get together (where someone made a presentation on internet businesses) to set up businesses that run 24 hours a day with or without him (although he has shifted lately from using drop shippers to fulfilling and shipping orders himself, so he is moving away from the truly passive concept). He took to heart another of Kiyosaki's principles - build businesses that can be sold.
I wonder if any of those people that have disappeared still take to heart the concept of passive income or if they gave it up when they gave up real estate and went back to living paycheck to paycheck? I personally no longer follow Kiyosaki or read his books - I feel he's simply repeating the same thing over and over now. I do credit him for opening my eyes to the power of passive income and for changing how I look at spending my money.
Loan Calculations
I seem to be in a financial clean up mode lately. First, I started converting all my paper bills and documentation to electronic form. Now, I’m taking on our debt. I pay off our credit cards in full each month, so typically the only debt I have is my home mortgage. But, last month, we bought two new cars. Prior to that, we had been car-payment free for several years. In all honesty, the idea of having two car payments makes me a little uncomfortable. That’s $900 a month of expenses I didn’t use to have that I now do. I’d love to go back to not having any car payments.
We recently got our tax refund – almost $10,000. Normally it’s never that big, as I don’t believe in giving Uncle Sam an interest free loan, but I spent most of last year working as a self-employed, independent contractor so I was able to take advantage of some nice deductions, the biggest of which I think was my mileage deduction for commuting. I’ve got a 66 mile round trip commute, so that really adds up over a whole year. My first thought was to put the refund towards my car loan. This loan amortization calculator is really nice in that it gives you options to add a couple different types of extra payments to the mix and show you how they will affect the loan. By applying my tax refund to the loan, I will shorten the length of the loan by almost two years (it’s a 5 year loan) and I’ll save about $1,500 in interest charges. Nice.
Then I went to lunch and another thought struck me while eating. I had just made a hard money investment that was earning 10%. I had some additional money saved up in a bank savings account. Maybe I could combine my savings with my tax refund and invest that and then use the income from that to pay my car loan. That’s the basic tenant of passive income – have your money work and make your payments for you. I did some calculations and discovered that, in order for investment income at 10% to cover my car payment, I’d need to invest close to $55,000. That’s a bit more than I have available, so this option is out. (Although my car loan is at 4.25% and I could invest at 10%, I’d need to invest a lump sum of more than twice my loan balance to cover the loan payment because my loan payment includes amortized principle repayments, whereas my passive income would be interest only payments.)
Back to the original plan. Paying off my car loan two years early is nice. It still means I’d have a car payment (two actually, since my wife has a new car too) for at least three years. I just couldn’t really get too excited about this.
Then I started looking at our budget. I’ve been using this great iPhone app called iReconcile for a couple of months now and I’ve also been meticulously categorizing each expense I have. The result is that I have a couple months worth of actual expense data I can look at and report on. I ran through our budget numbers and saw we’ve still got a decent cushion in our income, so I should have no problems sending extra money towards our car payments. Then another thought struck me. We are currently budgeting 15% of our income towards savings. Been doing that for years. We’ve got a nice size emergency fund built up now that should be able to cover us for several months should either my wife or I lose our job. What if, in addition to putting my tax refund towards the loan, I also redirect that 15% from savings towards my car payment? Using that nice amortization calculator again, I saw I could have my car paid off in 11 months!! And I’d save over $2,300 in interest!! Wow! And after my car was paid off, I’d switch to sending that money towards my wife’s car loan in addition to her regular payment and her loan would be paid off in the following year! Awesome!! And, carrying this further, I figure that after two years of doing this, I’d be well-versed in making due without the money I had been sending to the loans, so I’ll keep sending the money off – to my savings account this time. I figure I’ll be saving close to $2,000 a month. After doing that for a while, I should have a nice chunk of change to invest in hard money lending at 10% (hopefully the return will be back to the more normal 12% by then). I’ll build that nest egg up so the next time we need to buy cars, we will be able to use our passive income to pay for them!
There is a drawback to this plan – I will not be putting any money towards savings for two years. As I mentioned earlier, I’ve already got a several month cushion built up, so I’m comfortable with that. Furthermore, the extra loan payments are voluntary. If I suddenly run into a situation where I need to start saving again, I can just stop sending the extra payments in to the loan. Lastly, my wife works for Arizona State University. Due to state budget cuts, there is a good chance that if the one cent sales tax increase that will be voted on next week does not pass, she will lose her job due to the Draconian cuts that will have to be made in education spending at all levels. The general consensus is the tax will pass, but I think I’ll wait a couple days to make sure before I start sending any money anywhere.
This isn’t probably exciting for many readers, but it is for me. I feel like I am *that close* towards finally having enough passive income to pay for something big. This is a goal I’ve been striving towards since I started this blog almost 6 years ago. I also am starting to see and feel the “snowball effect” of saving and investing. It takes a long time to get a good chunk of money saved to generate any kind of significant passive income, but once you get there, things just start growing faster and faster.
We recently got our tax refund – almost $10,000. Normally it’s never that big, as I don’t believe in giving Uncle Sam an interest free loan, but I spent most of last year working as a self-employed, independent contractor so I was able to take advantage of some nice deductions, the biggest of which I think was my mileage deduction for commuting. I’ve got a 66 mile round trip commute, so that really adds up over a whole year. My first thought was to put the refund towards my car loan. This loan amortization calculator is really nice in that it gives you options to add a couple different types of extra payments to the mix and show you how they will affect the loan. By applying my tax refund to the loan, I will shorten the length of the loan by almost two years (it’s a 5 year loan) and I’ll save about $1,500 in interest charges. Nice.
Then I went to lunch and another thought struck me while eating. I had just made a hard money investment that was earning 10%. I had some additional money saved up in a bank savings account. Maybe I could combine my savings with my tax refund and invest that and then use the income from that to pay my car loan. That’s the basic tenant of passive income – have your money work and make your payments for you. I did some calculations and discovered that, in order for investment income at 10% to cover my car payment, I’d need to invest close to $55,000. That’s a bit more than I have available, so this option is out. (Although my car loan is at 4.25% and I could invest at 10%, I’d need to invest a lump sum of more than twice my loan balance to cover the loan payment because my loan payment includes amortized principle repayments, whereas my passive income would be interest only payments.)
Back to the original plan. Paying off my car loan two years early is nice. It still means I’d have a car payment (two actually, since my wife has a new car too) for at least three years. I just couldn’t really get too excited about this.
Then I started looking at our budget. I’ve been using this great iPhone app called iReconcile for a couple of months now and I’ve also been meticulously categorizing each expense I have. The result is that I have a couple months worth of actual expense data I can look at and report on. I ran through our budget numbers and saw we’ve still got a decent cushion in our income, so I should have no problems sending extra money towards our car payments. Then another thought struck me. We are currently budgeting 15% of our income towards savings. Been doing that for years. We’ve got a nice size emergency fund built up now that should be able to cover us for several months should either my wife or I lose our job. What if, in addition to putting my tax refund towards the loan, I also redirect that 15% from savings towards my car payment? Using that nice amortization calculator again, I saw I could have my car paid off in 11 months!! And I’d save over $2,300 in interest!! Wow! And after my car was paid off, I’d switch to sending that money towards my wife’s car loan in addition to her regular payment and her loan would be paid off in the following year! Awesome!! And, carrying this further, I figure that after two years of doing this, I’d be well-versed in making due without the money I had been sending to the loans, so I’ll keep sending the money off – to my savings account this time. I figure I’ll be saving close to $2,000 a month. After doing that for a while, I should have a nice chunk of change to invest in hard money lending at 10% (hopefully the return will be back to the more normal 12% by then). I’ll build that nest egg up so the next time we need to buy cars, we will be able to use our passive income to pay for them!
There is a drawback to this plan – I will not be putting any money towards savings for two years. As I mentioned earlier, I’ve already got a several month cushion built up, so I’m comfortable with that. Furthermore, the extra loan payments are voluntary. If I suddenly run into a situation where I need to start saving again, I can just stop sending the extra payments in to the loan. Lastly, my wife works for Arizona State University. Due to state budget cuts, there is a good chance that if the one cent sales tax increase that will be voted on next week does not pass, she will lose her job due to the Draconian cuts that will have to be made in education spending at all levels. The general consensus is the tax will pass, but I think I’ll wait a couple days to make sure before I start sending any money anywhere.
This isn’t probably exciting for many readers, but it is for me. I feel like I am *that close* towards finally having enough passive income to pay for something big. This is a goal I’ve been striving towards since I started this blog almost 6 years ago. I also am starting to see and feel the “snowball effect” of saving and investing. It takes a long time to get a good chunk of money saved to generate any kind of significant passive income, but once you get there, things just start growing faster and faster.
Self-Directed Roth IRA
Does anyone have any experience working with a self-directed IRA (Roth or otherwise)? I'm looking to head down this route and I have questions about the day-to-day operations - does it need a custodian (other than me), does the custodian write the checks and sign contracts, etc.
I've heard about using self-directed IRAs for several years, mostly about how they can be used for investing in real estate. I was always intrigued by this, but never really was in a position to set one up. A couple of changes going into effect in 2010 have made now seem like a good time to get going with this. In 2010, the income limits for who could convert a traditional IRA to a Roth IRA are going away. Additionally, if you convert in 2010, you can spread the taxes you'll need to pay over 2 years*. When I was laid off of my job over a year ago, I took my 401(k) and converted it into a rollover IRA. With the stock market down, now is good time to convert since I will have a lower amount I'll have to pay taxes on. (I should note that the current law applies to traditional IRAs converted to a Roth IRA. It's unclear if the IRS will decide that the law also applies to rollover IRAs converted to Roths. After talking to my CPA, I've decided that to be safe, I'll convert my rollover IRA to a traditional IRA and then convert it to a Roth.)
My point for doing this is to use the self-directed IRA funds to make hard money loans, which I have been doing for the last couple of years, earning between 10% and 12%. Getting that return tax free would be very nice.
* If you declare the conversion in 2010, you'll have to pay taxes on the converted amount in 2010. But if you don't, you must declare one half of the contributions in each of 2011 and 2012. What I will do in those years is calculate how much I will owe in taxes and simply adjust my W-4 withholding at my day job to spread the tax burden out over the entire year. Of course, it's likely that tax rates in 2011 and 2012 will be higher than 2010, but of course, that's anyone's guess. Lots can happen between now and then and I'm a fan of delaying paying taxes as long as you can.
I've heard about using self-directed IRAs for several years, mostly about how they can be used for investing in real estate. I was always intrigued by this, but never really was in a position to set one up. A couple of changes going into effect in 2010 have made now seem like a good time to get going with this. In 2010, the income limits for who could convert a traditional IRA to a Roth IRA are going away. Additionally, if you convert in 2010, you can spread the taxes you'll need to pay over 2 years*. When I was laid off of my job over a year ago, I took my 401(k) and converted it into a rollover IRA. With the stock market down, now is good time to convert since I will have a lower amount I'll have to pay taxes on. (I should note that the current law applies to traditional IRAs converted to a Roth IRA. It's unclear if the IRS will decide that the law also applies to rollover IRAs converted to Roths. After talking to my CPA, I've decided that to be safe, I'll convert my rollover IRA to a traditional IRA and then convert it to a Roth.)
My point for doing this is to use the self-directed IRA funds to make hard money loans, which I have been doing for the last couple of years, earning between 10% and 12%. Getting that return tax free would be very nice.
* If you declare the conversion in 2010, you'll have to pay taxes on the converted amount in 2010. But if you don't, you must declare one half of the contributions in each of 2011 and 2012. What I will do in those years is calculate how much I will owe in taxes and simply adjust my W-4 withholding at my day job to spread the tax burden out over the entire year. Of course, it's likely that tax rates in 2011 and 2012 will be higher than 2010, but of course, that's anyone's guess. Lots can happen between now and then and I'm a fan of delaying paying taxes as long as you can.
Opportunity Knocks And I Answer
The other day, I was sitting at my desk talking with a couple of my coworkers when one started talking about his credit score and how it had dropped about 40 points recently. This guy subscribes to a credit monitoring service and keeps a close eye on both his credit score and credit report. It turns out, his score dropped because of a motorcycle loan he recently took out to get a new motorcycle. He got a special low rate, but must not have read all the fine print because the loan showed up on his credit report as an unsecured loan, i.e. a credit card. Now, the motorcycle company still has the title and they are listed as a lienholder on the registration, so this is really a secured loan, yet it is being reported as unsecured.
So this dropped his credit score because it looks like he now has a maxed out credit card. We were discussing how we could get this corrected. We both agreed it would be a hard task. Chances are, if he called the customer service number for his loan, he'd get someone who didn't even know the difference between a secured and unsecured loan, let alone how they are reported to credit agencies, etc. So it looked like an uphill battle to get this changed. (I should point out that he is planning on purchasing his first house soon, which is why he wants his credit score to be as high as possible.)
After thinking about it for a few minutes, I realized I could help him. I could put on my hard money lender hat and lend him the money to pay off the loan. He could then make sure the lender reported it as closed and it would not be included in calculating his credit score. He would continue making monthly payments to me. I would not report the loan to any credit agencies (unless, of course, he defaults). I offered him the same terms as his current loan: 3 years, 7.9% APR. I also charged a 1 point origination fee. He accepted the deal and today we drew up the paperwork and signed everything. I've now got another hard money loan going, my fourth one overall. I get more passive income at a higher interest rate than a bank would pay and he gets a higher credit score. Everyone wins! And, to return to something I wrote about three years ago, the point I charged means I created money from nothing again!
I should point out the obvious: I trust this guy, I know he has a steady, stable job that he has been at for several years, I know the approximate value of the motorcycle, etc. I wouldn't normally make a hard money loan with the collateral being a depreciating asset like a vehicle.
So this dropped his credit score because it looks like he now has a maxed out credit card. We were discussing how we could get this corrected. We both agreed it would be a hard task. Chances are, if he called the customer service number for his loan, he'd get someone who didn't even know the difference between a secured and unsecured loan, let alone how they are reported to credit agencies, etc. So it looked like an uphill battle to get this changed. (I should point out that he is planning on purchasing his first house soon, which is why he wants his credit score to be as high as possible.)
After thinking about it for a few minutes, I realized I could help him. I could put on my hard money lender hat and lend him the money to pay off the loan. He could then make sure the lender reported it as closed and it would not be included in calculating his credit score. He would continue making monthly payments to me. I would not report the loan to any credit agencies (unless, of course, he defaults). I offered him the same terms as his current loan: 3 years, 7.9% APR. I also charged a 1 point origination fee. He accepted the deal and today we drew up the paperwork and signed everything. I've now got another hard money loan going, my fourth one overall. I get more passive income at a higher interest rate than a bank would pay and he gets a higher credit score. Everyone wins! And, to return to something I wrote about three years ago, the point I charged means I created money from nothing again!
I should point out the obvious: I trust this guy, I know he has a steady, stable job that he has been at for several years, I know the approximate value of the motorcycle, etc. I wouldn't normally make a hard money loan with the collateral being a depreciating asset like a vehicle.
Another Investment Made
Today I made another real estate investment. I'm a hard money lender in a first mortgage on a single family home in Oakland, California. This was a property the buyers picked up at a foreclosure auction. The amount owed on the defaulted mortgage was $495,000. The bank set the opening bid at $202,000 and the buyers got it for one cent more than the opening bid. There is probably about $25,000 worth of repair work to be done to it and three independent people have appraised the property at $325,000 to $350,000 after repairs. The buyers are contractors and each is a multi-millionaire. Les, the guy who I partnered with on my previous hard money deal in Louisiana, has known the buyers for over a decade and has found them to be very honorable.
The loan is for 1 year with interest only payments at 12% with a balloon payment for the entire principle due at the end of the term. No prepayment penalties, standard late fees. The net to me is 10% since 2% is taken for the servicing of the loan. The first mortgage is for $156,000, so the loan to value ratio is between 45% and 48%, depending on which appraisal you use.
I'll refer to this investment as Hard Money #3, with #2 being the Louisiana deal and #1 being the small loan I did about three years ago.
The loan is for 1 year with interest only payments at 12% with a balloon payment for the entire principle due at the end of the term. No prepayment penalties, standard late fees. The net to me is 10% since 2% is taken for the servicing of the loan. The first mortgage is for $156,000, so the loan to value ratio is between 45% and 48%, depending on which appraisal you use.
I'll refer to this investment as Hard Money #3, with #2 being the Louisiana deal and #1 being the small loan I did about three years ago.
When Life (And Death) Intervene
It's been a while since I have been able to post here.. I've been very busy at my day job and I was also out of state for four days last week, which created a big backlog of things I had to take care of upon my return.
I finally got the letter I requested from my old property manager stating that she was letting me out of the management agreement early. She claimed she never sent it to me before because she thought I just wanted a letter stating she got my letter, which she doesn't do. The most generous explanation would be that she never read my fax, because I clearly stated what I needed. Someone in the office probably got it and passed along the info incorrectly.
The letter was received last week and as soon as I got it, I called my new PM to tell her she could move forward on getting Rental #1 filled again. One bit of good news - along with the letter, the old PM also faxed me the names and phone numbers of two people who had contacted her about renting the property. I passed those on to my new PM as well.
The bad news is that I have still not been able to speak to my new PM in person yet. I've been calling every day for a week and have also sent email. Her cell phone was not being answered and, after day 3, I was no longer able to leave voice mail because she had no more room in her voice mailbox. The office number was answered by an answering service. Yesterday, I was able to leave voice mail on her cell phone again and today the answering service told me that there had been a death in the family and that was why she wasn't returning calls yet. I figured it had to be something like that. Anyway, I was told I would get a call back today around noon (which has come and gone). Unfortunately, the two parties interested in the property may no longer be interested after all this time has elapsed. Still, once the family issues have settled down for the new PM, I remain hopeful that she will be aggressively looking to get tenants in place for me.
The Houston apartment deal is set to close the end of this month. They still might be a bit short in raising funds and it might get pushed back one more month. I hope not.
I am also working on another 12% hard money loan. The borrower would be someone worth $5 - 10 million who is buying foreclosures at the courthouse. If the guy is willing to put up part of his interest in some North Dakota commercial real estate property (of which he has $5 million invested in property worth about $20 million) or part of his interest in a financial company (the one I was partnering with on the Louisiana deal), then I might do this. I've just had a very brief discussion with Les about this, so I'll have more info later, if it pans out. The 12% hard money deals are getting hard to find because interest rates are so low right now. But I'm not going to accept a deal just to get 12% if there are not substantial assets to back it up if the loan goes into default.
I finally got the letter I requested from my old property manager stating that she was letting me out of the management agreement early. She claimed she never sent it to me before because she thought I just wanted a letter stating she got my letter, which she doesn't do. The most generous explanation would be that she never read my fax, because I clearly stated what I needed. Someone in the office probably got it and passed along the info incorrectly.
The letter was received last week and as soon as I got it, I called my new PM to tell her she could move forward on getting Rental #1 filled again. One bit of good news - along with the letter, the old PM also faxed me the names and phone numbers of two people who had contacted her about renting the property. I passed those on to my new PM as well.
The bad news is that I have still not been able to speak to my new PM in person yet. I've been calling every day for a week and have also sent email. Her cell phone was not being answered and, after day 3, I was no longer able to leave voice mail because she had no more room in her voice mailbox. The office number was answered by an answering service. Yesterday, I was able to leave voice mail on her cell phone again and today the answering service told me that there had been a death in the family and that was why she wasn't returning calls yet. I figured it had to be something like that. Anyway, I was told I would get a call back today around noon (which has come and gone). Unfortunately, the two parties interested in the property may no longer be interested after all this time has elapsed. Still, once the family issues have settled down for the new PM, I remain hopeful that she will be aggressively looking to get tenants in place for me.
The Houston apartment deal is set to close the end of this month. They still might be a bit short in raising funds and it might get pushed back one more month. I hope not.
I am also working on another 12% hard money loan. The borrower would be someone worth $5 - 10 million who is buying foreclosures at the courthouse. If the guy is willing to put up part of his interest in some North Dakota commercial real estate property (of which he has $5 million invested in property worth about $20 million) or part of his interest in a financial company (the one I was partnering with on the Louisiana deal), then I might do this. I've just had a very brief discussion with Les about this, so I'll have more info later, if it pans out. The 12% hard money deals are getting hard to find because interest rates are so low right now. But I'm not going to accept a deal just to get 12% if there are not substantial assets to back it up if the loan goes into default.
Slow February
It's been a slow week, mostly because I caught some sort of bug that knocked me flat on my back for a couple of days. I'm still getting over it, but the worst appears to be behind me. My energy level is still pretty low, however.
No new news on the apartment deal. I suspect the principles are working away busily as escrow is set to close at the end of the month.
I also had a couple of leads on two new potential hard money lending deals, but those fell through. The people didn't need hard money after all. Too bad, as these would have both been 12% net to me. I'm on the lookout for others though.
My Rental #1 is still empty. I've got a call in with the management company to see how things are progressing towards getting a Section 8 tenant in there.
I'm getting antsy without any cashflow checks coming in!
No new news on the apartment deal. I suspect the principles are working away busily as escrow is set to close at the end of the month.
I also had a couple of leads on two new potential hard money lending deals, but those fell through. The people didn't need hard money after all. Too bad, as these would have both been 12% net to me. I'm on the lookout for others though.
My Rental #1 is still empty. I've got a call in with the management company to see how things are progressing towards getting a Section 8 tenant in there.
I'm getting antsy without any cashflow checks coming in!
Going On Vacation
I'm heading off to Kansas today for the Thanksgiving holiday, so there won't be any posts for a while. My PC also crashed and I'm having an extremely difficult time re-installing Windows, so even when I get back, it might be a while before I can post again..
Two quick notes:
Goldman Sachs today announced that mortgage lenders may need to scale back lending by up to $2 trillion dollars which could lead to a "substantial recession."
In response to the mortgage meltdown, the House voted to strengthen the rules on mortgage lenders. I don't have enough information now on the details of this particular bill, but I do think something needs to be done to help prevent the current situation from happening again. One thing that troubles me is that the bill prohibits balloon payments. As a private or hard-money lender, all of the mortgages and loans that I make have balloon payments. They are interest-only loans with the entire principle due in a balloon payment at the end of the term. However, I am not sure if this bill would apply to private money lenders, so it may not even affect people like me.
Two quick notes:
Goldman Sachs today announced that mortgage lenders may need to scale back lending by up to $2 trillion dollars which could lead to a "substantial recession."
In response to the mortgage meltdown, the House voted to strengthen the rules on mortgage lenders. I don't have enough information now on the details of this particular bill, but I do think something needs to be done to help prevent the current situation from happening again. One thing that troubles me is that the bill prohibits balloon payments. As a private or hard-money lender, all of the mortgages and loans that I make have balloon payments. They are interest-only loans with the entire principle due in a balloon payment at the end of the term. However, I am not sure if this bill would apply to private money lenders, so it may not even affect people like me.
Louisiana Update
I got another update on the Louisiana project. As of my last report, it was decided that a second mortgage would be placed on the property and the money from that would be used to make payments to the first mortgage holders, while the payments on the second would be delayed. I'm pleased to say that now all the players have agreed to the terms and the deal is now in escrow. We expect to have our payments be resumed before the end of the month.
Update On Louisiana Project
Sometime last month, I got word that the mortgage payment on the commercial properties in Louisiana was going to be missed. That payment is now 35 days past due. In that time, the mortgage investors (of which I am one) and minority property owners have had several conference calls discussing in what direction to proceed. The situation has been pretty fluid and I didn't want to post anything about it because it was changing so rapidly.
It looks like now we have a course of action that everyone agrees on - mortgage holders, minority owners, and the majority owner. The main issue is that the new majority owner is in a cash crunch. He is still actively rehabbing the property, but most of his money is tied up in other buildings and until he sells one of those, he's short on cash. In looking at our options, we discovered our mortgage note wasn't as strong as we would have liked - it specified only that we could collect the maximum amount we loaned, not any additional foreclosure costs, which could be in the tens of thousands for the amounts we are dealing with. (The note was provided by a title company, not a lawyer, and although it does have some nice points, we've learned from that mistake.) The value of the property has never been an issue and there would definitely be enough equity in the property to cover the mortgage loan, but foreclosure is a long process and the majority holder suggested the process would be even longer if bankruptcy was involved - a not-so-veiled threat.
So to get payments started again, the minority investors have proposed underwriting a second mortgage on the property. This mortgage will have stronger language, should a foreclosure still be required down the road, and it will be large enough so that the missed payment(s) and penalties on the first will be covered. There is still plenty of equity in the properties, as verified by a recent appraisal. The parking lot is in the process of being refinanced at a 50% lower interest rate. Since it already has a positive cash flow at hard money rates, the refi will not only get back some of the investors' money, but also increase the free cash available for meeting the mortgages on the other three buildings. It could take another month for the second to get hammered out and funded, so I may end up with two missed payments, but they will be made up shortly.
All in all, it's been a great learning experience for me. I get to listen in to how much more knowledgeable real estate investors handle problems and work out solutions that benefit everybody. I get experience with commercial lending and multi-million dollar deals. I am also impressed with how the minority owners are looking out for the mortgage holders. All of the minority owners have sold part or all of their interest to other investors, as Les did to me, so there are roughly 30 investors in this deal, although there are only about 5 owners. Even those owners that no longer have an interest in the mortgage note (i.e., they are in it for the capital gains, not the cash flow) are concerned that the mortgage holders start getting payments again and are brought current. They have been on top of this since the moment they found out a payment would be missed.
There are a lot of details I've left out, including the many other options that were investigated, but I feel confident the solution that has been reached will benefit everyone. Of course, being the detail-oriented person I am, I won't feel 100% comfortable until the second mortgage is signed, but I'm feeling much better about the situation than I was a month ago.
It looks like now we have a course of action that everyone agrees on - mortgage holders, minority owners, and the majority owner. The main issue is that the new majority owner is in a cash crunch. He is still actively rehabbing the property, but most of his money is tied up in other buildings and until he sells one of those, he's short on cash. In looking at our options, we discovered our mortgage note wasn't as strong as we would have liked - it specified only that we could collect the maximum amount we loaned, not any additional foreclosure costs, which could be in the tens of thousands for the amounts we are dealing with. (The note was provided by a title company, not a lawyer, and although it does have some nice points, we've learned from that mistake.) The value of the property has never been an issue and there would definitely be enough equity in the property to cover the mortgage loan, but foreclosure is a long process and the majority holder suggested the process would be even longer if bankruptcy was involved - a not-so-veiled threat.
So to get payments started again, the minority investors have proposed underwriting a second mortgage on the property. This mortgage will have stronger language, should a foreclosure still be required down the road, and it will be large enough so that the missed payment(s) and penalties on the first will be covered. There is still plenty of equity in the properties, as verified by a recent appraisal. The parking lot is in the process of being refinanced at a 50% lower interest rate. Since it already has a positive cash flow at hard money rates, the refi will not only get back some of the investors' money, but also increase the free cash available for meeting the mortgages on the other three buildings. It could take another month for the second to get hammered out and funded, so I may end up with two missed payments, but they will be made up shortly.
All in all, it's been a great learning experience for me. I get to listen in to how much more knowledgeable real estate investors handle problems and work out solutions that benefit everybody. I get experience with commercial lending and multi-million dollar deals. I am also impressed with how the minority owners are looking out for the mortgage holders. All of the minority owners have sold part or all of their interest to other investors, as Les did to me, so there are roughly 30 investors in this deal, although there are only about 5 owners. Even those owners that no longer have an interest in the mortgage note (i.e., they are in it for the capital gains, not the cash flow) are concerned that the mortgage holders start getting payments again and are brought current. They have been on top of this since the moment they found out a payment would be missed.
There are a lot of details I've left out, including the many other options that were investigated, but I feel confident the solution that has been reached will benefit everyone. Of course, being the detail-oriented person I am, I won't feel 100% comfortable until the second mortgage is signed, but I'm feeling much better about the situation than I was a month ago.
