Deflate-Gate and Real Estate
Tonight I want to talk about all the noises going around about the altering the pressure of the football, Tom Brady and the New England Patriots. When I hear those terms, deflate, gate and deflation I think how does it relate to real estate and inflation. Everyone is worried about their investment, what they are doing with their investment and what kind of return they are getting with their investment. When in fact some of these investments that they are have, whether they are doing minimal savings account type investments or guaranteed investments, they are not even keeping up with the cost of living or the inflation rate.
So their investments are actually being deflated because they are not even keeping up with the rate of inflation. One of the things you have if you own your home, you have the ability to earn so much money to really increase your net worth and earning potential. People are so conservative that they steer away from this one big opportunity. What I am talking about is leveraging the equity in your residence. I hear from people all the time how they paid off their mortgage and have no mortgage on their house. I tell them “thats too bad” they don’t understand that. What I mean is look at all the dead equity in the house. So what I mean is if you put a mortage on a house either through a home equity line of credit (HELOC) and took that money and borrowed it at the current rate that you can though a line of credit.
In Canada I can get people mortgages or lines of credits under 3%, so 2.5 or 2.8%.You take that money having to pay 3% interest and you invest it anywheres from 10-15%. I can invest peoples money in my investments and others peoples investments using either turn key solutions or second mortgages I can invest their money anywhere from 10-15%.
Two ways so your Investment isn’t deflated
Line of Credit on your House
You can put a line of credit on your house at 3%. You then invest it in second mortgage in someone elses investment. What that means is you are now acting as a bank to that person who is buying that investment property or it might be their personal property. What you are doing is you are lending them money and they are paying you a premium price for that loan. The reason you can charge such a high interest rate for that loan is because they are a higher risk than normal, at least from a bank’s perspective.
The banks risk tolerance is not as high as my risk tolerance level. I will take a higher risk than the banks will. What I do for my investors is I charge my investors a portion of the return that they are getting so I can guarantee their payments.
For example: lets say they are buying a house for $300,000.00 they go to the bank and they get a mortgage for 80% so $240,000.00 so they now need to come up with $60,000.00 so lets say they have $30,000.00 of their own money so they put that down. So that means they have at least 10% equity and some banks will allow a loan to value of up to 90% as long as its not their money. So now they can go off and get that other 10% somewhere else.
This is where we come in. So lets say, you put a second mortgage in there of $30,000.00 so the way this is finances is you have $240,000.00 from the bank as a 1st mortgage, $30,000.00 from the investor as a down payment and $30,000.00 from other sources such as from you or from me as a 2nd mortgage. So that brings you to $300,000 required to purchase the property.
So what the investor is doing is every month is paying the bank the monthly payments for that mortgage and they are also paying you for the money you loaned them. That loan can be constructed in different ways, the easiest way is an interest only rate on that $30,000.00 that you loaned them. For example: the $30,000.00 is at 12% so 12% of $30,000.00 is $3600.00 over 12 months period, divided that by 12. So they are paying you $300.00 a month and its interest only so that means that the principal is always there.
Most investors are happy to get access to money at 10-12% and then what happens I usually get a portion of that interest usually 2-3% and the investor or you get 9-10%. You then take that money and pay your interest rate on the loan that you took out for your Home Equity line of credit which is only 3% and you are netting anywhere from 7-9% depending on what we do there.
The concern people have is what happens if they do not pay. So if its coming through me because I am charging a premium to the investor I guarantee the payments. So if the investor is not paying I am still paying you the person who has loaned them the money. That is one way you reduce your risk..
The second is we make sure that the investment is a good investment. We look at the investor make sure that the investor has a good track record of paying.
The third way the most important is to not over leverage the investment. Meaning you want to have some equity in the game so if you ever have to foreclose on them there is still some equity in their so when you go to sell the house you can still get your investment out. For example: the investor has 10% so there is $30,000.00 worth equity from day one.
As the investment appreciates the equity in that home is building up and as that person is paying down their 1st mortgage there is also equity being built. So there are a lot of way to reduce the risk and as long as you know what you are doing by coming to someone like me I can help you steer you through that process. You are happy you are getting a higher return on your investment, I am happy I am making some money by facilitating this transaction and the investor is happy they are able to get a higher Loan to Value on their investment therefore they have less money on there, therefore their ROI is high as well. As long as it cash flows, so you have to look at the deal to make sure that it cash flows so the investor is able to make those payments without taxing the investment that much.
On the back end, if something does happen and we have to foreclose on the investor, I love Real Estate, I will take that property I will get someone else to come in as long as it makes sense and we did our due diligence. I am not afraid to own real estate and to take real estate back from someone who is not paying.