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A ''Loan-lord's'' Lament
| | Wednesday, October 15, 2003 @ 08:00 AM EDT
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Contributed by: John Behle
John Behle Properties
Read more archived articles about Paper and Mortgage Investing
I remember the days of being a landlord (though a therapist would probably tell me to try to forget). Plunging toilets and chasing tenants around trying to get rent never was fun for me. Calls at three in the morning over leaky taps may be an exciting challenge for some people. A tenant rebuilding a Harley Davidson on the living room carpet might be no big deal for a tough, macho, hardened landlord, but I'd rather invest safer and more profitably.
No More 3:00 AM Calls!
I've never had a Mortgage call me at 3:00 am in the morning. I've never had a Trust Deed get in a fight with the Trust Deed upstairs. Land Contracts don't lie to me. Mortgages don't drive away in pickup trucks owing me money.
Loan-lording is Safer!
With a tenant, you have no collateral for what they owe you. You are effectively loaning money to someone specifically because they can't afford it.
With a mortgage, they have their home as collateral and a strong interest in paying you.
Better than Triple-Net!
A tenant is not an owner. Much of the time, pride of ownership is lacking and they can beat a property to pieces. You are responsible for all major and most minor repairs.
An owner is responsible for all repairs and problems. The lender has a totally set payment and costs.
Price/ Rent Depreciation
In a market decline, a landlord's equity can be wiped out with a 20% drop in prices. The lender's equity takes priority.
The fair market rent can go down. Payments on mortgages are fixed.
Yield Appreciation
Sure, in an appreciating market, real estate values can go up. I'll never be one to say it never makes sense to own real estate.
Mortgages can appreciate too.
When properties go up in value, refinancing increases. As that happens, payors are chasing you down and paying you off at full face value on notes.
That means that a $10,000 note that I might buy for $6,000 can end up paying off overnight for the full $10,000. A $100,000 mortgage bought for $60,000 pays off for a $40,000 profit.
I call that appreciation. I apreciate it every time it happens. It can happen in down markets too.
Also, when rents and values are going up, it is a good time to trigger some additional payments on the principle of the loan. I encourage payors to pay extra principle payments to pay the loan off much earlier and save thousands in interest.
Skyrocketing Yields!
When a payor on a note increases his payment, my yield may double. By the way, there are over a hundred ways to improve my profits on notes. They work in up, down or any market.
Nothing Down Notes!
The leverage possibilities with notes equal or exceed any other form of investment.
It is not only possible, but simple to invest in notes with 100% or more financing.
A Free Note
Using both private and institutional sources, I have routinely financed notes for more than the cost of my purchase. That could be a risky procedure in real estate, but not in notes.
I can finance a note 100% and have a cash flow when I am done. I can finance notes for as much as 200% of the cost of purchase and still have a cash flow in some cases.
Cash and a Cash Flow
Here's a recent example from one of my students who now owns a franchise of National Note.
A property sold for $52,000 with $12,000 down. The $40,000 note was paid on for 7 years and then went into default.
The note was purchased for $10,000, restructured to $44,000 at 10% with a payment of $424.61 for 240 months.
200% of Cost
An investor loaned $20,000 against the note at 12% with a payment of $220.22 per month.
My student put almost $10,000 cash in his pocket and has a cash flow of over $200 per month for the next 20 years.
Most real estate investors take leverage for granted and don't realize it is just as powerful when applied to other investments.
No tax advantages?
Could a totally tax free investment that doesn't cost anything be considered a tax advantage?
IRA's and pension funds can invest in notes. You could be receiving 14% or more interest and a compounding cash flow in your IRA.
$80,000 Free
You can even buy and sell notes in your IRA. Let's look at a fun example of how to put $80,000 into an IRA for free.
Notes sell at a discount. If I bought a $50,000 note at a 16% yield, it would look like this.
$50,000 @ 10% $438.79 360 mo.
My Cost:
$32,630 @ 16% $438.79 360 mo.
If I purchased this note in an IRA and then sold off half of it at a 14% yield, I would receive the following.
$32,949 @ 14% $438.79 180 mo.
This would leave me with $319 more than it cost to buy the whole note and then payments of $438.79 per month for 15 years that begin in 15 years.
That totals over $80,000 in profit that didn't cost a cent and is tax deferred until retirement.
I'm not saying don't invest in real estate. I only suggest paper stacks up as well or better than most real estate.
Fewer Problems
Many of the standard problems real estate investors run into like property management, low cash flows, balloon payments and market price fluctuations are avoided or minimized by paper investment.
Retirement or financial independence can be summarized in two words - "Cash Flow".
Buy A Cash Flow
Why invest time and energy in an investment that may take many years to create a safe cash flow when you could begin investing in the purchase of cash flows by buying paper.
Immediate cash flows that increase over time with little management! There is no need to wait 10 to 20 years to see equity and cash flow from your efforts. No need to be dependant upon the economy and real estate appreciation to profit from your investments.
In a future issue we will look more at the comparison between notes and real estate. A side by side 20 year investment proforma will be highlighted. You'll see in black and white how paper stacks up.
Note: John D. Behle is one of the foremost educators and practitioners in the field of discounted paper investment. His innovative strategies and techniques have shaped the industry. He is the author of several courses and books that deal specifically with Real Estate Paper. Learn more about his courses and books here.
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