From REI Academy
Your tired of hassling with tenants, contractors, leasing agents,
brokers and attorneys. You have owned income producing property for
the last 20 - 30 years, and youre ready to leave behind the day to
day problems and enjoy life. The kids are on their own and you want
to travel at will and spend winters in a warmer climate or summers
in a cooler one. You only have one problem; if you sell your real
estate holdings and invest the proceeds in CDs, your income will be
cut by 80% or more. The stock market looks too high and too risky.
"If only I could replace my monthly income without depleting my
nest egg," you think, "and without losing sleep over the stock
market."
Well, there is a way to make this happen: by investing in trust
deeds, or private mortgages loans. Simply put, trust deeds are
short-term loans to real estate investors secured by the value of
the real property as collateral. Investors who invest in trust deeds
typically make a 12 to 18 per cent return, paid out monthly, with a
minimum investment of just $50,000 and relatively low risk. As a
result, they are able to enhance their lifestyle significantly
without threat to their principal, or built a large nest egg,
safely, in a relatively short period of time.
Case in Point
I'll give you an example: my wife's parents. My father-in-law has
had a couple of concerns. First, he's significantly older than his
wife--he is 77, she is 65. Second, women have a longer life
expectancy than men. Statistically, my mother-in-law will live 13 to
15 years beyond my father-in-law. My father-in-law has an
old-fashioned Sears pension which cuts in half when he dies, and
Social Security, which also cuts down by about one-third when he
dies. These diminished resources would fail to provide adequately
for my mother-in-law.
The two of them decided that they needed more income, or some way
to increase their capital base. At the time, they owned an apartment
complex in Alvin, Texas, which was a good investment, but wasn't
producing any income after the expense of vacancies, repairs,
management, and so forth. So they sold the apartment complex and
invested the proceeds in three different mortgage liens through my
company. From the $200,000 they invested, we created a monthly
income of about $3000. We did a projection showing that over 13
years, we'll be able to replace every lost dollar of pension income
and social security income, should he pass on first, double the
principal in real terms.
In addition, my in-laws can now live higher than they did. In
fact, they just decided to take a $10,000 trip to Europe, rather
then the usual $2,000 cruise out of Galveston. They're glad they
didn't opt for Plan B, an annuity, with a return of only 8 per cent
and the guarantee that when you die, you'll lose your total
investment. Now my in-laws have a 14 to 18 per cent return, plus
their original investment.
How Trust Deeds Work
Private mortgage loans are never greater than 65 per cent of the
appraised value, secured by income producing property only
(apartments, homes, office buildings, warehouses), and only made on
investor property. A lot of notes on the market are connected to
primary residences. With Texas homesteads, for example, there are
many different laws involved, many of which benefit the borrower.
Most mortgage companies originating private mortgages lend only to
professional real estate investors, not owner-occupants of
residential properties, thereby by-passing the problems with
homesteads. The companies make a profit by charging borrowers
origination fees for the loans, while the investors collect all the
interest.
We personally examine and select properties carefully to make
certain that they truly are worth the appraised value. We look at
the property as much or more than we look at the borrower, knowing
that the property will always be there. Property doesn't get
divorced, property doesn't declare bankruptcy, property doesn't have
financial problems. Property is the basis of wealth in the United
States, in nine out of ten families.
Should we have to foreclose, we can sell the property at 10 or 15
per cent off and still make a profit. We can put it on the market at
25 per cent off and still make a profit. But defaults are rare. Our
portfolio for the last 20 years shows a 4 per cent default rate.
When a default occurs, the mortgage company picks up the slack.
Theyll handle the foreclosure, any property rehabilitation
necessary, and the property sale.
Many of my clients start with a small portion of their portfolio
to see how it works. Once they put in an initial $50,000, and it
works real well, they're eager to invest a greater amount of money
because their comfort level rises. They receive the monthly income
checks, become familiar with the process, all the safeguards that we
use, and then they call me up and say, "Do you have anything else
available?" Over the course of time, they increase their investment
to a point where their comfort level meets their income need.
Low Risk
The risks are fairly limited if solid procedures are followed.
All mortgage documentation will be standardized by the mortgage
company originating the loan, so the investor will know that the
mortgage note and deed of trust are drawn up to his benefit.
The risk is going to be somewhat higher than government insured
money market funds, or government bonds. But it will be
substantially lower than stocks, gold, silver, or any assets that
you hope will increase in price--assets that could go up or down in
value.
An Individual Decision
Deciding how much of your portfolio might ultimately go into
mortgage liens is an individual decision. I personally have 75 to 80
per cent in mortgage liens, which represents the proceeds from the
sale of my automotive business. Before I became actively involved in
the private mortgage business, I was an investor, looking for a way
to replace the income from the business with a less time-intensive
instrument. I spent two years researching the possibilities. My
father-in-law has 50 to 60 per cent of his portfolio invested in
mortgage liens through our company. It depends on the size of your
portfolio, what you're trying to accomplish.
I can't recommend mortgage liens highly enough. I've studied
finance and investment for many years, have been an investor in many
different vehicles, and it's all a trade-off between risk and
return. The mortgage lien, when properly executed, is absolutely
excellent; I don't know any investment available to the public that
has that match of investment return versus risk.
You may hear about people who go into venture capital funds and
make 40, 50 per cent, but most individuals can't take part because
they don't have the minimum investment--usually one million dollars
or more--required. Minimum investment with most private mortgage
originators is fifty thousand dollars. You won't make a 40 or 50 per
cent return, but you will make a solid, guaranteed 14 to 18 percent,
which is superior to most other investments. That amount of yield
can go a long way toward making your retirement both secure and more
comfortable than you ever dreamed.
If you have any doubts, just ask my in-laws--when they get back
from Europe.
Don Konipol
Don H Konipol has a BS in Economics and an MBA in Finance from
the University of Michigan and is a licensed Texas Real Estate
Broker and Mortgage Broker. Mr. Konipol is General Partner of the
Managed Mortgage Investment Fund LP, a private limited partnership
that invests in short term, high yield private mortgage notes. He
can be reached at 832.577.8838 or by email at dkonipol@yahoo.com
