“Safe High Return Investments Naples – 7 Secrets To Finding The Right Investment In Today’s Troubled Market!”

You’ve scrimped, you’ve saved, and now you’re ready to invest and have your money working for you.  You probably want a high yielding investment with minimal risk, and something that is fairly liquid so that if you need to access that cash, you can do so fairly quickly.  Oh, and while you’re at it, you really want something that has minimal risk and that is secured.

Yeah…right…is that really possible?

The challenge is that there are a lot of not-so well-meaning folks out there with their hands out, palms up, ready to take your money, regardless of whether or not you benefit!  As far as they’re concerned, EVERYTHING that they offer is a good investment!

Then again, there are some really good people out there, too!  These are the folks that have integrity, and that offer investments that minimize your risk and maximize your return.  So, the big questions are:

How can you tell the difference?  What makes a good investment?

Before you consider any investment, you should first do a little research and ask some specific questions.  And that’s what this report is all about: Asking the right questions!  The answers, in turn, will allow you to make a more educated decision; one that is right for you and for your situation.

Here are a few questions that you should be asking…and before we go on, let me mention that we’ll cover each one of them in depth later in this article:

1. Is the investment secured and if so, by what?
2. Is the investment insured?
3. Is the investment liquid, or will you be required to tie-up your capital for an indeterminate or long period of time?
4. What kind of returns does the investment yield?  And do those returns offset whatever risk is involved with the investment?
5. Does the investment produce monthly cash flow, or does interest accrue until the end of the term (like a bank Certificate of Deposit)
6. Does the investment require a lot of capital?  Or can you get into it for a modest amount?
7. Is the investment an ACTIVE one where you’re required to work to get a return (as in buying a house that needs fixing-up) or is it PASSIVE, meaning that your money does all of the work for you!
8. And finally, do you need a license to do this in your state? (Yes…I can count!  I just thought I’d add an extra!)

WHEW!  Answering all of those questions seems a bit daunting, doesn’t it?

Tell you what:  let’s eat the proverbial elephant one bite at a time and review each one of them!  And for fun, let’s review each one of them in the context of Private Lending (isn’t that why you’re on this site?)…

Is the Investment Secured?

Obviously, when you’re investing any amount of money into anything, you’d like to know that if things go bad, you have a way to recapture your principal.  If you invest in an oil well, for example, you probably can’t repossess the well if it doesn’t produce.  The same thing applies in the stock market and quite a few other investments…

Private lending on real property is different:  your money is secured by two items, one with more teeth than the other:

NOTE:  This is the form that the borrower signs acknowledging the debt, and agreeing to repay it following a written set of terms.  In the banking business, the NOTE is referred to as the evidence of the debt.  If you’ve ever borrowed money to purchase or refinance a house, you’ve signed this agreement to repay the debt.

MORTGAGE/TRUST DEED:  This is the document that gives the lender the right to take the property back in case of default of any kind, including non-payment, delinquent taxes, property condition, etc.  It is filed as public record and basically says to the borrower:  “If you don’t pay…you don’t stay!”

So, when you loan money backed by real estate, you should always insist that the borrower give you both a note and a deed of trust/mortgage (state-specific document) at the closing.  That way, you’ll have a secured lien against the property.  And keep in mind one other important item:

ALWAYS limit your loan to under 70-75% of the market value of the property!!

Banks made a huge mistake by loaning 95-100% of the value of the property, and in many cases, even more!  First of all, these were high-risk loans.  Second, when properties devalued across the country, they took huge losses!!

Don’t make their mistake! One of the great things about being a private lender is that you’re getting a secured investment, protected by both the lien against the property and the equity in the property!  That’s why they also call it equity lending.

Is the Investment Insured?

Private lending is one of the few investment vehicles that is protected by not just one, but two forms of insurance with you, the lender, named as the loss payee.  In other words, should either one of these policies pay off, you, the lender, will get your money before anyone else!

The two types of insurance are title insurance and hazard insurance.  Let’s look at each of them and how they protect you, the lender:

HAZARD INSURANCE:  This is an insurance policy taken out by the property investor that names you as the beneficiary should the property ever burn down, get destroyed by a natural disaster, etc.  Most folks know this as property insurance – what they fail to remember is that in almost all real estate transactions, it’s the lender that gets paid off before anyone else!  The lender in this case is…you!

TITLE INSURANCE:  Personally, I love this type of insurance, because it gives the lender the assurance that their lien is a valid one; one that will be paid off before any other liens.  The way it works is that the property investor pays to insure you, the lender, against all encumbrances against the property.  The title insurance company’s abstractors research the title to the property, and when the deal closes, insures that all back-taxes are paid, as are all other liens against the property (things like weed liens, city-imposed liens, HOA liens, etc.).

How Liquid is the Investment?

A more specific question here would be whether you can pull your money out of the investment in a relatively short period of time, or whether you’re required to stay in it indeterminately.

Most of the time, when you invest in company start-ups, you’ll end up leaving your capital in the deal for quite some time.  Sure, there are other investment vehicles that are semi-liquid, like the stock & bond markets, but keep in mind that getting out is subject to the vagrancy of the market:  can you sell at a price high enough to get back your initial investment?

And, if you leave your money in an investment for longer than 36 months, you run the risk of the economy changing, meaning that you might be able to get a higher rate of return someplace else!

Private lending, on the other hand, is liquid in two ways and, it isn’t subject to the whims of the market!

1. Similar to a bank’s Certificate of Deposit, most terms are 36 months or less. With a bank’s CD, you’re obligated to stay in the investment until the term is over, unless you want to incur a penalty.   However, when you loan money privately to a real estate investor, in many case they’ll work hard to replace your money early if necessary just to keep a good relationship with you.  That doesn’t mean that you should enter into an agreement for 36 months expecting to get your money out early!  It DOES mean that private individuals are a lot more flexible than banks or other institutions!
2. You can also sell your receivable (loan) during the term should you need quick cash! There are companies all over the U.S. that buy private mortgages.  Their buy-rates are determined by the amount of the note, the location, type, and condition of the collateral, the interest rate, etc.  We normally tell our clients about a firm that we use, SMI Funding.  Their principals have been in business for over 15 years and we’ve found them to be fair as well as efficient.  If you’d like to find out more about them, email one of the principals, Jayme Kahla, at Jayme.Kahla@smifunding.com.

What Kind of Return (Yield) Should I Expect From This Investment?

Many people seem satisfied with a bank’s CD rate of return which, as of this writing, is about 1.5% for a 6 month CD and about 2.5% for a three-year commitment. (Source:  bankaholic.com)

Let’s say, however, that the inflation rate is higher than 1.5% to 2.5%.  That is certainly possible, because historically, any time a country prints money, the inflation rate goes through the roof.  The point is, if the inflation rate exceeds your rate of return, you’re actually losing money!

In order to stay ahead of inflation, you need to be making at least twice bank rates.  What if I told you that you could get as much as three times bank rates in a secured investment?

That’s where private lending comes in.  Market rates for private loans range anywhere from 2-3 times what you would earn in a CD at your bank.  That said, there are some things that you should consider about this type of investment:

1. What will the market bear? Sure, wouldn’t we all like to get 40-50% passively on our money?  Of course we would!  But the market, however, keeps things competitive and as a result, the current rates for secured real estate investments run 2-3 times bank CD rates.
2. How long do you want to keep your money invested? Again, bank CDs set the standard here, with lower yields for shorter investments, and higher yields for longer ones.  So, if you only want to invest for 6 months at a time, you should expect a lower return than if you want to invest for 36 months.

1. Does the risk offset the yield? 2^nd lien mortgages are a little more risky than 1^st lien mortgages – as a result, they pay better.  So while you can probably receive a 5-10% return on 1^st lien mortgages, if you’re willing to invest in a 2^nd lien mortgage, expect your yield to be 1-2 points higher.  Oh, and the good thing about investing in 2^nd liens is that they require less money!

Does the Investment Product Monthly Cash Flow?

Some people like monthly cash flow from their investments, and others like their investment to accrue interest over time, paying off at the end of the investment term.  There really is no right or wrong answer – the only answer is the one that is right for you!

So let’s look at a few things to consider when researching this particular question, and be sure and first ask yourself:  What’s more important to you – monthly cash flow, risk, or time invested?

First, understand that the property investor is willing to pay a higher rate of return if you invest with him for a longer, rather than a shorter term.  He’ll also pay a higher return if you’re willing to collect your payments at the end of the investment rather than wanting something every single month.  And of course, he’ll pay you more if you are willing to subordinate to 2^nd lien position.

The reverse is true:  traditionally, you’ll get a lower rate of return if you want your interest paid monthly, invest for a short time only (6 months) and want only 1^st lien position.

You should also consider the following:

1. Is there cash coming in on the property? In other words, if the investor is rehabbing the property with the intent of reselling it, there isn’t any money coming in to make payments every month.  On the other hand, if he is renting the property out long term, he should be able to afford monthly payments.
2. Get a statement every month. Even if you elect to receive a higher return and not cash out until the end of the investment term, you should ask for monthly statements so that you know what your money is earning, each and every month.
3. Do You Need Cash Flow? We have several private investors that are retired and really want, and benefit from, monthly cash flow.  They love this option over that of the bank, mainly because they’re getting a higher rate of return and they’re getting a check every month.  In this way, they can live off the interest of their investment without touching the principal.

We also have investors who appreciate a little higher return – they’re very comfortable leaving their interest in the investment until the end of the investment term, at which point they cash-out both their initial principal and all of the accrued interest.

Does the Investment Need a Lot of Capital?

A lot of investments require that you have at least $100,000 in order to invest.  And while that’s great for people who have acquired significant capital, there are also a lot of people who have smaller amounts that they, too, would like to invest.

One of the great things about private lending is that you can get into a high yielding secured investment for not a whole lot of capital.  Granted, when you’re first starting out and only want to invest smaller amounts, you’ll probably be taking a 2^nd lien position.  Sure, they’re a little riskier than 1^st liens, but remember, they usually also pay more than 1^st liens.  And the really great part is that on many 2^nd liens, you can invest as little as $15,000, and sometimes, even less.

That’s not to say that a good investor can’t help you place large amounts, too.  The difference will be both in the lien position as well as the collateral itself.

The bottom line is that once again, you are the final decision maker and you need to do what is right for you and meets your investment needs.

Is the Investment ACTIVE or PASSIVE?

One of the things that you should consider in any investment is whether it is an ACTIVE one where you’re required to work to get a return (as in buying a house that needs fixing-up) or is it PASSIVE, meaning that your money does all of the work for you.

We work with some active investors, though not as many as you might imagine.  An active investor wants to be involved with the property – we consider an active investor more of a JV partner and as such, they are actively involved in the decisions about what property to buy, how to structure the deal, what improvements to make, when and how to sell the property and how much to sell the property for.  This active participation generally helps to distinguish the relationship from a “security” that would require registration or exemption from registration.

Some of our active investors are working with us on commercial projects; others like to see their money at work and, having nothing else on their hands, like to be at the job site “overseeing” the work every day!  Hey, to each their own, right?

On the other hand, we have a lot of passive investors, too.   These are people who are content just knowing that their money is working for them, 7 days a week, 24 hours a day, and they don’t have to lift a finger!  Their money accrues interest every single day whether they’re at work, at home, or on some island in the Caribbean!

Again, you need to do what is right for you.

Do You Need a License to Do This In Your State?

State and Federal Lending laws were designed to protect “Ma & Pa” consumer from the evil lending conglomerates!  LOL!  Okay, so may all lenders aren’t evil, but the Fair Lending Act (FLA), the Truth in Lending Act (TILA), the Real Estate Settlement and Procedures Act (RESPA) and their corresponding Regulations X and Z were designed to keep the so called big boys from trying to pull the wool over the eyes of the consumer.

That said, in most states, you do NOT need a license to be a private lender, provided that you are only loaning your own funds and not those of someone else.  You should, however, be aware of several things that may affect your loan:

1. Usury: You don’t ever want the interest rate of your loan to exceed your State’s usury laws.  If you stay in the market range of 2-3 times bank rates, you’ll be fine, as no state that I know of has a usury rate that’s 10% or less.
2. High Cost Lending Laws & Section 32: Back when the lending industry went crazy, individual States as well as the Federal government imposed interest rate limits on home loans, saying that anything that exceeded these “high costs” must be fully disclosed as a “high cost loan.”  Now granted, the original intent only applied to owner-occupied refinances.  Special interest groups, however, rallied around this concept and so, the High Cost Lending in most states is seen as anything over 12%.

YOU DON’T HAVE TO WORRY ABOUT THIS IF…

1. You run everything by an attorney.  A good closing attorney will NOT let you close a high cost loan without all of the proper documentation.
2. You keep the interest rate at going market rates for private real estate loans:  somewhere in the neighborhood of 2-3 times normal CD rates.  That will pretty much insure that you don’t run afoul of either usury or high cost lending issues.
3. Occupancy: Some states have pretty stringent homestead laws, protecting the homeowner who actually lives in his own property.  These laws do NOT apply to investment properties owned by an investor.  So, to protect you, I would highly suggest that you do not loan money on owner-occupied properties but rather, only on investment properties.

Private Lending is a Great Investment

Let’s go back and review the 7 (or was that 8?) things to consider when making an investment.

You want an investment that is secured, insured, relatively liquid, high yielding, doesn’t require a lot of capital, provides cash flow, is passive and doesn’t require licensing!

You’ve learned how to find the right answers to these questions, and you’ve also learned that Private Lending provides opportunities in all of those areas.

So How Do I Get Involved?

Now that you’ve decided to learn more about private lending, the next step is simple:  pick up the phone and call me (my information’s on the Website) or drop me an email.  I welcome the chance to meet with you and tell you more about this tremendous opportunity.

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