Note as Collateral: Sunday Morning Thoughts 10 February 2013

It’s no surprise that a note is collateral for its face value.  When considering becoming a private lender one would wonder do they have to wait for the maturity date of the loan agreement to receive a return on investment?  The short answer, no.

For arguments sake, let’s say you are a private lender who has a note with a face value of $100,000.  Granted you cannot use the note as if it was an ATM, but you can put it to more use than just sitting and waiting for the maturity date of the loan agreement to realize a return on investment.  A note can be used as collateral to purchase something else or you can sell the loan at face value or at a discount, or even option a portion of the note to someone else.

If you think that you do not have the right to sell the note, take a look at lending papers from large institutions, in the fine print, they have a clause with the equivalent of ‘and or assigns’, which gives them the right to resell your contract to another entity.

With the $100,000 note in hand you can borrow against the note to lend again, for a lessor amount but the note is an instrument of collateral.  Collateral is defined as:

a : of, relating to, or being collateral used as security (as for payment of a debt or performance of a contract)

b : secured by collateral.

Many private lenders resell their notes at a discount once the loan has matured.  A note is considered matured when it is at least 3 to 6 months old.  Often times, the investor, the lender has created a note for, will refinance the project with conventional lending after the maturity of the loan to pay off the private lender.

But what if the investor defaults on the loan payment?  Then the private lender can sell the note as a non-performing asset or do a foreclosure, whichever suits the lenders preference for a return on investment.

A private lender may also hold a first and a second on a property, but may only wish to sell either the first or second position.  The choice is that of the lender.  Many banking institutions can lose money in the second position, mainly due to not monitoring the payments of the borrower.  A borrower, when financial trouble hits will almost always default on the second mortgage payments long before they allow the first mortgage to default.

The second position is not necessarily a losing position.  If a borrower were to default on the second loan, the second can start a foreclosure and once the foreclosure is complete begin making payments to the first.

This is only an overview of what a private lender can do with a note, other than waiting for the maturity date to realize a return on investment.  Thinking outside of a conventional box may prove to be more profitable.  Conventional thought is to wait for maturity, the unconventional is to sell part or all interest in the note, use the note as collateral, or option the note.  Just remember consult with an attorney for the legal uses of a note before making a final decision.

Related articles

• Usury versus Reality (orthosphere.org)

Backing the American Dream: Sunday Morning Thoughts 23 December 2012

As a private lender of mortgage notes, one can find a way to make the American Dream of Home Ownership a reality once again. 

The banks are still having tight credit restrictions, and good people with good credit are finding it hard to get a purchase loan whether first time buyer or second purchase.  Although on the flip side of the coin, at present, refinance and reverse mortgages are a booming industry for the banks; which makes this a lucrative time for small lenders and lender groups to capitalize on a much-needed product, single family purchase loans.  There are considerations to make such as usury laws, which are the interest rates a lender can charge.  The average institutional bank interest rate for a 30 year mortgage is 3.125% and for 15 year loan the rate is 2.75%.

When considering lending to consumers and investors, usury laws prohibit going above a set limit for some states.  In general, the set limit for most states is 10% for other states the limit is a little less at 8%.

Many hard money lenders are within the guidelines of lending but they are navigating in tricky waters.

With real estate showing signs of a slow recovery in many areas, and institutional lenders implementing tougher credit restrictions, the time for private lending is now.

So, where do you find qualified borrowers?

Believe it or not, people who had the interest only loan and lost their homes after the loan reset.  Many of the families with the interest only loan were banking on being able to refinance the loan into more reasonable payments than the reset payments.  But the problem, a story we all familiar with by now, the value of homes had dropped drastically in most areas, and most home owners were faced with one added dilemma, being upside down on their mortgages.

Under water mortgages, loan resets, and the added frustration of denied loan modifications only has made private lending necessary and lucrative for a real estate recovery.  Getting involved is easy, fill out the form at the bottom of this article for more information on becoming a private lender.

Name(required)

Email(required)

Phone Number

Your Question? or Statement(required)

Your level of Investing?(required)

Some real estate investing

Invest in the stock market

Never invested this is the first time

Just seeing what private lending in real estate is about

Do You have a 401K, IRA, collateral, cash, etc(required)

Submit

Δ

Related articles

• Watch: Reverse Mortgages on the Rise for Current Homeowners (abcnews.go.com)
• Mortgage Myths – 3 Things to Know (lexingtonlaw.com)
• Investing Strategies for a Struggling Real Estate Market: Sunday Morning Thoughts 09 December 2012 (backedbyrealestate.com)
• 15-Year Mortgages Gain Popularity With Buyers (callaruschrealestate.wordpress.com)
• An Insight on the Direction of Fair Lending (ibaeducationblog.com)
• Consumer Protection Bureau to Examine Private Lenders (insidehighered.com)

 

Real Estate Retirement Investing Part 1: Sunday Morning Thoughts 02 September 2012

With the recent economic downturn many people have seen their retirement almost go up in smoke. From 401k to savings accounts to buying stocks and bonds, this recession-depression has taken its toll on all investments. Many people who have already entered into retirement have noticed the sharp decrease in the money they use to have.

Racking their brains with, how long will my funds last? Can I sustain my lifestyle?

So how do you recoup your retirement in a down turn economy?

The easy answer, make better investments.

Money market and 401k accounts depend on a fund manager to make decisions for you for a certain type of product. So if the fund is invested in for instance, green energy or emerging markets then that’s the only type of investment the fund is allowed to invest in, without regard of market performance.

So if another type of investment would prove to be more lucrative for you, the fund manager is not allowed to change the investment strategy but is bound to the specific type of fund investments.

So, you will never receive a call telling you that there is a better investment on the horizon. This is why many funds can be poorly producing funds when compared to individuals who invest in stocks on their own.
But what about investing in real estate?

Some people believe that real estate investing is a thing of the past and has seen its prime, but as long as there are people on earth, real estate will always remain a sound investment.

Related articles

• What’s Your Investing Strategy: Sunday Morning Thoughts 19 August 2012 (backedbyrealestate.com)
• What Is A 401k Retirement Plan? (answers.com)
• 5 Mid-Year Tuneups for Your 401k (bargaineering.com)
• Jill on Money: Index funds, retirement, inheritance (cbsnews.com)

Bull or Bear Market, Food For Thought: Sunday Morning Thoughts 13 November 2011

Image via Wikipedia

The day before Thanksgiving many of us will be preparing our homes to receive guests, or making the trek to a friend, or relatives gathering.

But the 23rd of November is D-day for the congressional debt committee.

There are many factors to consider:

Will Greece’s economy fail, causing them to no longer have credit whereby having to move to an all cash system?

What will be the outcome of the Italian issue, and its subsequent effect on the global economy?

There are many questions, with speculations disguised as answers.

The bigger question, what are you going to do about your situation?  Your personal finances are just as important as the global economy because you are a part of that same deteriorating economy. 

What are some of the ways you plan to protect the money you currently have from the future impending inflation, and will you still gain interest on your money?  Will it be enough to either live off of, or will you use it to build for the future?

With the rocking and rolling of the stock market, should you place your money in bonds?  But didn’t the analyst say the bond market is a bubble waiting to burst?

Should you move to tangible assets such as gold, silver, etc.? 

Will futures be the new ‘now’ market for growing an income, or retirement portfolio?

What’s happening with mutual funds?

The answer to all of these questions is everything has a cycle.  Study the cycles and you may be able to predict an outcome.

The stock market currently appears to be in a sideways pattern and with a new cycle starting around the year 2016, but what type of cycle will it be?

Are we in for a Bull or Bear market future?
Only time can really tell.

All bubbles do burst eventually, the futures market may be having gains at this time of the year, and gold’s value is through the roof and moving higher with silver riding its coattails. Mutual funds are currently stagnating, but some will gain with the shifts of the S and P.

Real Estate is still a viable consideration for investing, if done wisely.  The area, growth rate, employment, and expanding or shrinking housing availability are factors when considering an investment property. 

With all time lows on residential and commercial property it would only make sense to have an implemented strategy to invest in real estate.

If you decide to buy a house to rent out, check to make sure other homeowners are not doing the same thing, and if so then how many other homes will be for rent and at what price.

If you decide to invest in an apartment then check to see if there is a shadow market from residential.  If a shadow market exists, how much of an impact will it have on being able to rent your units, and still being able to not only break even on the new investment but also realize a profit?

For which ever investment vehicle you are going to utilize to guard against an uncertain future, ensure you weigh all the pros and cons and make an investment choice which will work for you, yielding you appreciation in the present and future.

Knowing what you know now, would you have invested in the stock market and real estate after the crash in the early 1900’s?

As with all cycles and time, change is always on the horizon.

 

Neutral Arbitrage and the Effect on ROR: Sunday Morning Thoughts 19 December 2010

Quick recap, positive arbitrage is when your investment return increases with financing.  Negative arbitrage, your investment return decreases with financing.  Neutral arbitrage, your return on investment does not change with financing.

So how can an investor have positive or neutral arbitrage, picking the right loan is key to having a better rate of return.  When considering commercial property, such as multi-unit apartments, a low to no interest loan is best.

Interest only loans were only meant to have a life of no more than five years, after five years the loan could become upside down.  In today’s credit climate having a no interest loan would be difficult.  Lenders were admonished by the government for offering what is known as an investor’s loan to the average American.  This offering to the average person caused many to be in over their head at the time of the loan reset, contributing to our current foreclosure crisis.

All three arbitrage can be present when private lending, of course not at the same time; it just depends on the deal.

Related Articles:

http://backedbyrealestate.com/2010/11/14/arbitrage-and-real-estate-sunday-morning-thoughts-14-november-2010/

Negative Arbitrage and the Effect on ROR:  Sunday Morning Thoughts 12 December 2010

Negative Arbitrage and the Effect on ROR: Sunday Morning Thoughts 12 December 2010

Different risk and return of investment for the different investors (Photo credit: Wikipedia)

Negative arbitrage does not mean you will lose on the investment, negative arbitrage is when your investment return decreases with debt financing.  This is not to say that you are losing in your investment.  It means that you could have had a higher return with cheaper money.

Although the term negative arbitrage conjures images and feelings of loss, but that does not have to be the case.  With lending practices being tougher and the cost of money being higher, negative arbitrage will become more and more of a factor with investors.

What this means, the investment needs to have greater cash flow and/or appreciation to make up for the loss in arbitrage.

Related articles

• Millionaire Calculator (creditloan.com)
• http://backedbyrealestate.com/2010/11/14/arbitrage-and-real-estate-sunday-morning-thoughts-14-november-2010/