Arbitrage, Profiting from the Spread: Sunday Morning Thoughts 19 May 2013

Arbitrage The simultaneous purchase and sale of an asset in order to profit from a difference in the price. It is a trade that profits by exploiting price differences of identical or similar financial instruments, on different markets or in different forms. Arbitrage exists as a result of market inefficiencies; it provides a mechanism to ensure prices do not deviate substantially from fair value for long periods of time.  http://www.investopedia.com/video/play/arbitrage/

 

Understand when you look up the word arbitrage, you will find many varied references to the stock market, for this post the term will be applied to real estate investing.

In real estate as a private lender arbitrage will be the spread between the costs of monies.  If you borrow $100,000 at 3% interest then loan the same money at 6% interest then you would have 3% interest as a gain.  Many private lenders and real estate investors have taken advantage of arbitrage.

Flipping houses is also a form of arbitrage.  The method is slightly different today but it is still the buy low/ borrow low and loan/sell at a high rate and the difference will be the profit.

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Investing Strategies for a Struggling Real Estate Market: Sunday Morning Thoughts 09 December 2012

What subprime crisis? Affordable houses are everywhere. (Photo credit: woodleywonderworks)

It should not matter if the glass is half empty or half full, it has something in it.

So in a flat real estate market, how can you make money?

Having control over a property and not owning the property can prove to be a fast way to improving your bottom line, but what about another option?

Becoming the bank, becoming a private lender; some of the benefits:

• You don’t own the property

• You don’t have to pay the property tax

•  You don’t do maintenance and repairs

•  No dealing with tenants

Private lending is a way to be involved with the real estate recovery, but without the risk that a property owner would have.

As a private lender you can invest a sum of money for a specified period of time, at a nice rate of interest.  You do not spend time mowing the lawn, or fixing the minor or major problems, you lend money secured by real estate and collect either a monthly payment or a lump sum after a specified holding period.

Being a private lender is a viable option in a buyer or seller’s market.  A private lender can lend money to buyers and refinance sellers, so it would not matter the type of market, your investment could appreciate.

In our current financial economy, the buyers are looking for money sources since many lending institutions are having trouble with lending.  Sellers are looking for private lending sources to refinance or sell their property.

No matter what type of real estate market, your investment can still earn.

For more thoughts on lending read our other articles.

Private Lending Retirement Investing Part I

Private Lending Retirement Investing Part II

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How to Avoid a Ponzi Scheme: Sunday Morning Thoughts 15 July 2012

The Ponzi Scheme (Photo credit: Wikipedia)

How did Ponzi scheme get its name?

Like most things, it is named after the man, Charles Ponzi, who defrauded many people out of their money in the 1920’s under the guise of high profit and a no to low risk of investment.

All investments have risk; nothing is going to give you a 100 percent return on your money. Each investment with us has its own risk factor as well.

We are an investment real estate company, and each individual property has its own types of risk, some higher and others lower.

For example, a multi-family apartment with 85-99% occupancy has a lower risk than a multi-family apartment in the same area with equivalent number of units but has lower occupancy, such as 50-65% would be a greater risk of investment.

So how can you recognize a Ponzi scheme? (From the SEC website)

Many Ponzi schemes share common characteristics. Look for these warning signs:

• High investment returns with little or no risk. Every investment carries some degree of risk, and investments yielding higher returns typically involve more risk. Be highly suspicious of any “guaranteed” investment opportunity.

 

• Overly consistent returns. Investments tend to go up and down over time, especially those seeking high returns. Be suspect of an investment that continues to generate regular, positive returns regardless of overall market conditions.

 

• Unregistered investments. Ponzi schemes typically involve investments that have not been registered with the SEC or with state regulators. Registration is important because it provides investors with access to key information about the company’s management, products, services, and finances.

 

• Unlicensed sellers. Federal and state securities laws require investment professionals and their firms to be licensed or registered. Most Ponzi schemes involve unlicensed individuals or unregistered firms.
  Secretive and/or complex strategies. Avoiding investments you don’t understand or for which you can’t get complete information is a good rule of thumb.

 

• Issues with paperwork. Ignore excuses regarding why you can’t review information about an investment in writing, and always read an investment’s prospectus or disclosure statement carefully before you invest. Also, account statement errors may be a sign that funds are not being invested as promised.

 

• Difficulty receiving payments. Be suspicious if you don’t receive a payment or have difficulty cashing out your investment. Keep in mind that Ponzi scheme promoters sometimes encourage participants to “roll over” promised payments by offering even higher investment returns.

As a private lender in real estate has a measure of risk, which changes with each property type. Properties are listed and handled by licensed real estate agents, although some properties maybe for sell by owner. But as the lender, or in other words being the bank, your investment is secured by real estate.

Payments on your investment go through a mortgage servicing company, which is what the banks use. Properties go through escrow with instructions that you will have a copy of. You are named as lender on the loan papers not owner of the property, so property taxes are NOT your responsibility.

Although investors ask us to keep their investment in the “gap” we do not. Once a property has sold or is refinanced through another source, we return the initial investment. Although some lenders opt to have monthly payments, others decide to wait for a property to be transferred to a new owner or to the completion of the exit strategy.

Each property is different and exit strategies will vary. All of which we will let you know up front before you make a decision on whether to invest in a particular property.

Diversifying Your Stock Portfolio with Real Estate: Sunday Morning Thoughts 04 December 2011

Many stock market investors are beginning to diversify their current stock portfolios with real estate.  REIT’s are gaining a renewed interest among stock holders.  Not all REIT’s are created equal.  The one REIT with the best gaining potential is multi-family.  Whereas mortgage REIT’s are obviously not considered a sound investment at this time due to the housing glut.

Multifamily REIT’s are not necessarily a bullish investment, but they are expected to see more gains in the coming year.   With the current drop in unemployment, and the overall stabilizing of our economy one could wonder, has the bottom been reached and when will we begin experiencing an upward movement in the real estate recovery?

The foreclosure waves have not finished.

In previous posts we touched on commercial foreclosures barely getting started.  There will be more commercial foreclosures in the New Year, for both commercial and residential.

So why diversify my portfolio with a “loser investment”?

Real Estate is not a losing proposition.  Now is the time to invest in many, many lucrative deals, especially when it comes to multifamily.  A lot of commercial lenders are going to foreclose on commercial properties due to over leverage, or the property has become an alligator due to neglectful management.  Either way once a commercial property becomes a losing investment and a loan is due a reassessment then the lender may not re-qualify the original owners for a new loan or extension of the same loan.

During the residential housing boom there was a commercial, multi- family housing, boom as well.  Interest only loans and low down payments made it easy for a novice to enter the commercial market.  Now with the market reassessing itself, many of the same novice owners have had an obscene rise in vacancy rates, and even worse deferred in maintenance.

From the banks perspective if a commercial investment is losing tenants, and has deferred maintenance and is now unable to support itself on its Net Operating Income, then when the reassessment time arrives an owner may lose the property even if current on payments.  For a commercial property, the net operating income will still have to support its debt.

So how can this scenario be avoided?

Do not defer maintenance, keep your tenants happy, and have an outstanding management team.  This can be the difference in apartment community having no vacancies while the other community has an abnormally high vacancy rate.

So if you are in vesting in a REIT then you may want to consider investing in something as a private lender only so you can be closer to the actual investment.

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

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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.

 

Arbitrage and Real Estate: Sunday Morning Thoughts 14 November 2010

Arbitrage by definition: The practice of taking advantage of a price difference between two or more markets striking a combination of matching deals that capitalize upon the imbalance, the profit being the difference between the market prices.

And there you have it, a way of making money in real estate in a nutshell, now let’s crack it open and see what’s inside.

An example of simple arbitrage and real estate, making money on the difference as a private lender, would be if you did not have the funds but you have a wealthy Uncle with the funds.  The Uncle loans you the money at 2% simple interest then you loan the money to an investor with the collateral being real estate at 8% simple interest.  Not a bad investment.  Your Uncle loaned you the money as a personal loan then you in turn loan the money on a collateralized investment.  The difference of 6% simple interest is your profit.  This is how easy arbitrage works.

Now let’s look at arbitrage with your own credit abilities if the rich Uncle does not pan out.

There are many types of credit you can utilize to perform arbitrage.

Line of Credit from a property you currently own. You use the line of credit which has a low-interest rate then invest in a property as a private lender gaining a profit from the difference in interest.  You can pay a line of credit with the line of credit (read the fine print from your lender to make sure).  You may also have tax benefits, consult an accountant for the specific in’s and out’s.

Credit Offers in the mail, the best ones are the interest free for 12 months or longer.  But be careful to read the fine print, make sure the creditor is not charging a fee for using the credit.  Also make sure the investment you are lending on can be liquidated before the interest begins from the credit offer.  With the use of this type of credit, payments would have to be made, so make sure you can cover the monthly payments with either payments from the loan or from your own source of funds.

Credit Cards you currently have.  Credit card companies send convenience checks to some of their customers from time to time.  Occasionally the use of the check may or may not be interest free for a period of time.  But beware some of the check offers charge a fee, which may be a percentage of the value of the check.

Obtaining a regular personal loan, this may not give you the best arbitrage but as long as there is a difference in interest in your favor then you still have arbitrage.  A personal loan normally will have a specific limit with a payment schedule, so monthly payments are something to be considered.

Which ever way fits your situation arbitrage is a way a private lender can make money in real estate with minimal use of your own liquid funds.  You can make a profit on lending the funds and make a profit on the use of the funds.  So even if you are just thinking about becoming a private lender.

 

Print Your Own Money Invest in Real Estate: Sunday Morning Thoughts 7 November 2010

Investing in real estate can be like having your very own printing press.  First you load the press with the type of money you would like to reproduce, small investment to get your feet wet, or something larger which will make a greater profit.  There are multiple upon multiple ways to purchase, maintain, and have passive income in real estate.  Which ever proven strategy you use, investing in real estate can be very profitable.

Becoming a private lender is a good way to earn passive income without taking a great risk.  The property you are agreeing to finance should already be generating an income to sustain the payment, maintenance, and incidentals.  And the loan to value should not be any greater than 70%.

Real estate investing can be a safe alternative to the volatility of the stock market.  Real estate values do fluctuate but not as much as in the stock market on any given trading day.

Being a private lender you have the security of having your investment being backed by profitable real estate and secured by legal documents.  Documents such as being named as lender on insurances, title, home, hazard policies.  So if the investment should burn down to the ground your money is not lost. 

There are many types of situations and properties a person or persons can lend on.  It could be a Single Family Residence (SFR), multi-unit such as duplex or apartments; an office building, medical or retail, or even a triple net lease.  A triple net lease is for larger companies to occupy a property, such as a Starbucks, or Costco, Jack-in-the-box, CVS pharmacy, business of these types do not always own the building they are occupying.  It’s better for their bottom line and yours for them to lease the property they are doing business from. 

No matter which one or ones you invest in, you would be generating passive income.  What does this really mean; your money is working for you not you working for your money.  The money comes in the form of equity in a property because the loan amount is no greater than 70% of the value of the property. 

The lump sum, quarterly or monthly payment, however you chose, will be a passive income since you do not have to punch in on a time clock to earn it.  And it does not matter if you do or do not show up, what matters, is that you do invest. 

Depending on how you invest, you may receive tax breaks.

So if you do nothing then you will continue to have what you currently have.  If you chose to invest in real estate then you could have a better return than the current money market account, or CD.  Ask yourself, would you prefer to keep your investment money safer in a bank account or CD and earn a possible 1.5% or would you like to invest in the stability of real estate and earn up to 8%.

Each one has a risk which risk are you willing to take.

The Re-Evaluation of Money and Mortgages: Sunday Morning Thoughts 24 October 2010

Image by Toban Black via Flickr

President Obama recently asked the Bank of China to reevaluate the Yuan to raise its value.  This would help make the dollar weaker against China’s Yuan, making it easier for America to compete in the world of exporting.  The hope of this strategy is to help keep jobs in the United States instead making it more cost-effective to manufacture abroad.

Sounds good in theory.

If China were to reevaluate the Yuan to a higher value, then manufacturers would probably reevaluate the use of China as one of the many low-cost manufacturing places.  With China’s current booming economy the next back up for manufacturing has been Indonesia and Vietnam.  Companies such as Nike have already moved the bulk of their manufacturing to these countries.

So even if the Yuan were reevaluated to a higher value, this would not necessarily return manufacturing jobs to the U.S.  The cost to manufacture in America would out weigh the product, making it more expensive and harder to afford.

With the reevaluation of money in world markets, one would begin to think of the reevaluation of our current banking system.  The New Reform is slowly taking place colliding with the halting of foreclosure due to paperwork problems.  The process of foreclosure is not halting, but proceeding in court has halted to make certain all paperwork is in order.

Re-evaluating properties in foreclosure has now become more of a problem for the banks, which they did anticipate.  The investors in notes, mortgages secured by property, are now clamoring for a refund.  This is very understandable since they were promised good notes, and not bad notes.

Investing in a good note is the amount you will pay for a note that will later mature and generate passive income.  A bad note is also a good investment but from a different stand point.  An investor would not pay as much for a potentially non-producing note (bad note), when compared to a producing note, (good note).

Law suits are to be expected for the fraudulent selling of notes.  The lawsuits will more than likely make mortgage policy stricter and bolster the use of the New Banking Reform watch dogs.

So, how can an Investor profit from all this Bad News?

Well, opportunity is knocking, purchasing non-producing notes at a deep discount and acquiring the property for resale.  Purchasing producing notes, at a deep discount because other investors might not want to deal with the banking issues to come; and then profiting from the passive income generated by the note.

Stocks, and Bonds, and Mortgages Oh My: Sunday Morning Thoughts 10 October2010

This week has proven to be a time of many revelations.  The stock market has seen the dollar gain strength to only start falling short of expectations.  The Fed’s are possibly going to lower interest rates to help the slow moving economy to pick up speed.

And now President Obama has had to veto a bill that would make it harder on already suffering home owners when it comes to foreclosures.  The Senate obviously did not read the bill before voting.  As for mortgages-whether defaulting or originating -things are about to get even trickier and stricter than before.

What comes to mind, how all this will effect my investments, and is the New Reform Bill currently working?

The bill is slowly being implemented.  Keep you eyes and ears open for more updates.

The Bond market is rumored to be on the verge of a bubble about to burst.  But as you watch the video, predicting a bubble that will bust, is not as easy as you think.

Is A Bond Bubble Forming? Economist Burton Malkiel talks to Steve Forbes about the trouble with bubbles.

A final note on mortgages, as we have all heard Bank of America, JPMorgan Chase, and Ally Financial are placing some of their foreclosures on hold.  No doubt to check the paperwork.  Although halting the paperwork, will not halt the foreclosure process.  So once the paperwork is in order then the foreclosure will happen.

Many courts have been throwing the request for foreclosures out, due to multiple errors in the paperwork.  A temporary pause could cause pressure later.  Like when water is held by a dam then the dam is removed, the rage of the water causes more damage than if it were allowed to flow freely in the first place.

A false lift to home prices could happen in some areas if almost all of the foreclosures are halted for an area with a lot of impending foreclosures. If only a few are halted then the impact would be slight to minimal at best.

By no means will the temporary halting of foreclosures turn this better than buyers market into a strong seller’s market.  Instead of buyers stopping a new purchase of a home, one may want to take advantage of this new Bad News and invest through a short sale.

The lenders may be more apt to work towards getting a short sale approved instead of losing money on a halted foreclosure.

When Bad News is Good News: Sunday Morning Thoughts 26 September 2010

What do these stocks have in common?

The Washington Post, Coca-Cola, and Geico.

In two words, Warren Buffett.

The aforementioned stocks, their price once fell on the heels of bad news.  One person’s sell is another person’s buy.  As for these stocks, Warren Buffett was able to purchase them on the heels of bad news, when their prices fell.

These once producing stocks, turned into an undervalued bonanza due to bad news, turned and became highly producing once again.

Warren Buffett uses specific criteria to indicate whether a stock will perform well or not.  One of his criteria is specific to how businesses run and if they are monopolies in the consumer market.  They either have to have a specific service or product geared towards consumers.

Profitable real estate investing in undervalued properties is very similar to how Warren Buffett picks his undervalued stocks.

In real estate investing, there is more to it than mere location.  There are a number of factors when picking a profitable investment property.

The location for rental property is best in a lower middle to mid- middle class area.  This type of area will always have rental properties and rental communities which tend to have lower vacancies.

A note on vacancies, if a property is mismanaged in a profitable area, the vacancy for that particular property would be high for the area.  Most people regardless of socioeconomic class like living in a nice place.

No one wants to live in an apartment community or a rental house if things never seem to be in working order.  If the kitchen sink leaks and it takes the management 3 months to fix it, then that would be a poorly managed rental.

If the bath tub does not drain properly, well the tenants will probably move because people expect things for personal hygiene and food preparation to be in working order.

Delayed fixing and a do not care attitude can take a once profitable investment and turn it into a money pit.

The Bad News is your investment is tanking.

The Good News for a savvier investor is the investment is not turning a profit but with better management can become very profitable.

Picking a once profitable rental investment which has now become another person’s money pit, can prove to be lucrative if you have a plan to change it from mismanaged to renter/ people friendly.

There will always be diligence on the part of the investor regardless of type of investment.  When a person invests with Immaculate Enterprises, we ensure an investment property will be properly managed for our renters.