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Big Returns From Early Payoff Of Mortgage Notes

EARLY PAYOFF = BIG PROFIT

Example 1:  Michigan Note 1st position

  • Note Purchase Price: $39,250 (on 9/22/15)
  • Note Status: Semi-Performing 1st Position Mortgage Note
  • UPB at purchase: $79,096
  • 9/28/17 homeowner refi and payoff (2 years later)
  • Payments 9/22/15 – 9/28/17: $30,370
  • Payoff Amount: $78,697
  • Total Profit: $30,370 + $78,697 – $39,250 = $69,817
  • ROI = $69,817/$39,250 = 177% in 2 years

Example 2:  Michigan Note 2nd position

  • Note Purchase Price:  $15,000 (on 2/14/17)
  • Note Status:  Non-Performing 2nd Mortgage Note
  • UPB at purchase:  $34,265
  • 6/30/17 homeowner payoff (4.5 months later)
  • Payments 2/14/17 – 6/30/17:  $0  (no payments since June 2012)
  • Payoff Amount:  $60,023
  • Attorney fees:  $1863
  • Total Profit:  $0 + $60,023 – $15,000 – $1,863 = $43,160
  • ROI = $43,160/$15,000 = 287% in 0.375 years 

Example 3:  North Carolina 3rd position

Are Notes Risky?

RISK DEFINED… Webster says …the possibility of loss.
Any investment there is a possibility of loss but we have to look at the probability of loss.
The probability of loss in a stock is much higher than the probability of loss for a secured real estate mortgage note.

WHY LESS RISKY?

  • We are buying the note at a discount to the value of the property (20-50%) and therefore if the property value goes down then we still have an equity cushion.
  • We stand to make more money if the homeowner defaults since we have upside potential.
  • Homeowners are emotionally attached to the home.
  • No liability – If homeowner slips and falls then you are not liable as the “bank”.
  • Property is insured – unlike a stock, the collateral (property) is insured.

POSSIBLE RISK FACTORS

  • Legislative changes to the foreclosure process – low impact and states rules getting better.
  • Federal oversight changes – low probability with current administration.
  • Unexpected home value depreciation – low impact since buying at discount.
  • Changes in CFPB or FDCPA rules and regulations – low risk since at peak of regulations and now introducing bills to remove or eliminate some of the regulation.
  • Increase costs of foreclosure and legal expenses – cost have stabilized in recent years.
  • Improper collateral – make sure you are working with counterparties you trust.

Typical Mortgage Note Returns

INSTITUTIONAL NOTES
1. Performing – Long establish good pay history, good cash flow, no upside potential and mostly purchased by the money center banks like Bank Of America, Chase, Wells Fargo, etc.
YIELDS: 6-7%
2. Re-Performing – paying again for 12 months or longer, good income stream, limited upside and bought at small discount of 10-20%.
YIELDS: 8-12%
3. Sub-Performing – buy at better discount and better equity protection but requires more intensive management to avoid redefault. The pay history is a bit sporadic but they always seem to pay.
YIELDS: 10-15%
4. Non-Performing – Can generate large returns and fast returns on capital if managed properly. They provide no current yield and are high touch and high maintenance assets. Discounts vary but typical range 30-50%.
YIELDS: 15-50+%

SELLER/OWNER FINANCING
When a seller acts as the bank or lender and carries a mortgage on the subject property.
RATES – 7-12%. Depends on amount down, note position, borrower credit, loan to value, etc. Buy these notes at a discount and get an even better return.

PRIVATE LENDING/HARD MONEY LENDING
Fix and Flip financing
Fix to Rent financing
Buy to Rent financing Refinance and Bridge financing
RATES – 10-18% plus points

Why Buy Mortgage Notes? Top 13 Reasons!

WHY NOTES?

1. Passive – Servicer collects payment and send you check.
2. Steady and consistent income – get checks for 30 years.
3. No repairs or maintenance – Have you ever called your lender to come fix your toilet?
4. No tenants – No turnover, evictions or chasing rent.
5. No liability – No worries if a homeowner slips and falls.
6. Secured – the investment is secured by real estate.
7. Insured – unlike a stock, the collateral (property) is insured.
8. No taxes and Insurance – Homeowner pays and TI is typically escrowed with the servicing company so need to track.
9. Notes are typically more liquid than rental real estate.
10. Consistently higher returns – Typically double digit.
11. Scalable – easier to manage several hundred notes versus several hundred rental properties.
12. No HOA or COA – homeowners must pay directly.
13. No property management costs – instead we pay a fraction to a servicing company to collect payments.

Solo 401k Features

The solo 401k offers a variety of advantages over the self directed IRA such as:

• Higher Contribution Limits. IRA allows only $5,500 and an additional $1,000 catch up provision (age 50+) whereas the Solo 401k allows an annual contribution limit of $53,000 with an additional $6,000 catch up provision (age 50+) and the same amount for the spouse that generates compensation from the business. Therefore, together you can contribute up to $106,000 or $118,000 if you are over age 50 if you have sufficient earned income. In addition, the Solo 401k plan contains a Roth account portion which can be contributed to without income limits.

• Loan Feature. You can borrow funds from your Solo 401k up to $50,000 or 50% of the balance (whichever is smaller) for any reason and pay your 401k back at a low interest rate typically prime plus 1%. The funds can be used for any purpose. You can use them for personal needs or partner with yourself to buy a property and even buy that car you always wanted.

• Total Control of Allowable Investment Choices. Since you are trustee of the Solo 401k plan, you will be able to invest in almost any type of investment that suits you as long as it is allowed. Making an investment with your Solo 401K Plan is as simple as writing a check. As trustee of the Solo 401K Plan, you will have total control over your retirement assets to make real estate and other investments without custodian consent. This helps in your ability to snatch up those great deals before anyone else.

• Reduced Fees. Making an investment in your Solo 401k is as easy as writing a check and does not require you to get permission or have funds wired or mailed from a custodian which allows you to eliminate the expenses associated with this type of activity. This also allows you to act quickly when you find a great investment and need to move fast to take advantage of the opportunity. Yes a checkbook IRA can also have similar check writing permissions.

• UDFI Exemption. If you buy real estate in an IRA and use funds from your plan and a portion of the funds from debt financing, typically you would incur UDFI (Unrelated Debt Financed Income) which is a type of UBTI (Unrelated Business Taxable Income) on which taxes must be paid. In a Solo 401k, you are not subject to the UDFI rules and the UBTI tax (which is typically around 35%).

Solo 401k plans can accept most rollovers from IRAs, other 401ks, 403b, SIMPLE, etc. The only exception is that a Roth IRA cannot be rolled into a Solo 401k plan.

How To Measure The Growth Rate

There are many people that have no idea on how well or how poorly their investment is doing and really don’t have any idea on how to measure the growth rate over a set period of time. I ask clients did you really make money and how much and many times the answer is “I am not sure…”

One of my favorite Key Performance Indicators (or KPI for short) is the Compound Annual Growth Rate (CAGR). ​
The CAGR is a useful measure of growth over longer time frames. It can be thought of as the growth rate that gets you from the initial investment value to the ending investment value if you assume that the investment has been compounding over that time period. Although average annual return is a common measure for mutual funds, CAGR is a better measure of an investment’s return over time.

The formula for CAGR is:​
CAGR = ( EV / BV)^1/n – 1
where:
EV = Investment’s ending value
BV = Investment’s beginning value
n = Number of periods (months, years, etc.)

Example: Invest $10,000 in a certain Fund for five years
Year End Value
1 $ 11,700
2 $ 12,800
3 $ 14,700
4 $ 16,000
5 $ 18,600

We can calculate the CAGR of the investment as:
CAGR = ( 18,600 / 10,000)^1/5 – 1 = .1321 = 13.21%

Like any indicator there are limitations. One limitations is that because it calculates the smooth average of growth over a period, it ignores volatility and implies that the growth during that time was steady which is not always the case. For more details check out Investopedia.

9 Business Boosting Ideas

     1.  Focus on what matters

People who are highly productive have established clear goals and a vision for what they want to achieve long term. They focus on what matters and what is going to bring them additional income.  Highly productive people don’t confuse activity with accomplishment.

  1. Know the difference between important and urgent

If you get side-tracked by unimportant urgent issues, you spend your time fighting needless fires instead of getting done what matters

  1. Plan your day

To stay on track you have to be meticulous about planning your to-do items. Also set your goals around what you want and make sure your appointments and meetings are worthwhile.

  1. Organize your business

You don’t have to have a pristine desktop but you do have to have a system that lets you find the information and files you need when you need them (PG helps with this in part). Keeps files on each of your course topics and a way to easily access them.

  1. Have a routine

When you make the more mundane aspects of life routine, you free up brain power and time. You should wake up each day at the same time and have simple morning routines for example.

  1. Salvage wasted time

Those two hours your flight is delayed can be great news for your productivity. When you keep a list of things that need to be done, you can quickly scan it and pick out the actions you can take in the time you have. Answer a few email messages or return a call in the few minutes before your next meeting.

  1. Do things you don’t want to do first

Overcoming procrastination—at least most of the time—is essential for high performance

  1. Don’t be a perfectionist

At the heart of procrastination, you’ll often find one of its root causes: perfectionism. Let that go. It’s not attainable and will just lead to dread when it’s time to start big or challenging projects.

  1. Leave small gaps in your schedule

Sometimes you just need some time to think. Highly productive people leave room in schedule to think and get ideas. When you’re too tightly scheduled you can end up undermining your creativity and big picture thinking.

 

Are you passionate about your investment?

Many people want to invest in things they are passionate about and believe in and therefore they open a Self-Directed IRA (SDIRA) . They don’t have any idea of how the stock or bond markets work and truthfully they don’t care. They want to make money in business and ideas they care about and are passionate about. Personally, I like real estate related investments such as buying property, buying notes, private lending, rentals, etc. However, not everyone is like me. So I thought it would be fun to show some crazy investments that should get you thinking. I found these articles in CNN Money which I though would be fun to share.

1. Dressage Horses – This guy named Rajeev had a friend who runs a horse farm in New Jersey and told him how he travels to Europe to pick out the best horses to bring back to the U.S. for dressage competitions. He decided that he would help fund the horse acquisitions. Therefore, he used his retirement account to finance the purchase of four horses, all of which turned out to be good picks. When they sold the horses 18 months later, they split the profits evenly. The return on investment from the four dressage horses ranged from 23% to 76% apiece — a far cry from the single-digit returns of a bond or stock fund.
2. Dairy Cows – This same guy met a struggling farmer who told him how hard it was to secure agricultural loans to acquire farm animals. He then decide to set up a self-directed IRA so that he could acquire the cows. The farmer agreed to lease the cows for five years, giving him the time to make enough money to then acquire the cows for a fixed price. From acquisition to sale, the guy made a 25% return which came out to be an annualized return of about 12% from what he fondly calls his cash cows.
3. Vodka Distillery – No, Don Poffenroth wasn’t drunk when he decided to empty the contents of his 401(k) and invest it all in a vodka distillery. In 2007, he left a marketing job in the corporate world and rolled over his company-sponsored 401k into a self-directed IRA. He was confident that he could do better than the 3-7% returns his 401k was making so he took the money he had accumulated and put it toward building a vodka distillery in Spokane, Wash. Three years later, after he invested $300,000 in the distillery, Poffenroth claims his 60% stake is worth about $1.2 million.
4. Hair Salon – One man from Arkansas invested his entire retirement fund -$300,000 – into a hair salon university. So far, the investment has turned out to be a success. After buying the business for $300,000, a recent third-party valuation estimated that the company is now worth $2.9 million — ten times the initial investment.
5. Habanero peppers – One person bought a 50% stake in a habanero pepper farm that was owned by his cousin. He was convinced that through the value of the land and the sale of the peppers he could double his money in two to three years.
6. Organic Sprouts – One person dumped out his 401k and used the money to invest a sprout-growing business. The company, which grows 16 kinds of organic sprouts without using any soil (only nutrient-rich water) has been a hit. They claim to have a nearly 100% return on their capital in just over a year based on a recent valuation of the business.

So what are you passionate about?

Importance Of Having an IRA or 401k

Did you know that based on the Social Security Administration’s 2015 report, the trust is on track to be depleted in 2034, at which point the system will be able to pay 79% of benefits from ongoing tax revenue? With the impending Social Security crisis and dramatic reduction in pensions, it is imperative to begin planning for your financial future today.

Social security might not be enough to secure your financial future. That’s why the government created the different retirement savings plans, to help you save for your future. IRA and 401k investments grow tax free or tax deferred and compounds over time which maximizes your ability to grow wealth. There are many advantages to these plans and the advantages will depend in part on the plan itself.

IRA And 401k Plan Advantages include:

A. Compound Interest– Albert Einstein once said that “compound interest is the most powerful force on earth”. This is because compound interest occurs when you not only earn interest on your original investment sum, but also on the interest earned on the original sum.
Let’s look at a simple example of the power of compound interest. Let’s say at age 25 you decide to cut out your daily coffee routine at the local coffee shop saving you $4.50 a day. That would equate to a little over $136 per month. If you received 8% in compounding interest each year, you would have $25,533 after 10 years. So after 20 years, you’d receive $80,658 and after 40 years when you are age 65, you’d have an amazing $456,602.

B. Tax Deferred and Tax Free Profits – This great power of compound interest is increased dramatically in tax advantage accounts such as IRAs and 401ks since the tax free or tax deferred portion also grows each year. For example, if you were to contribute $5,000 a year to a tax advantaged account like an IRA or 401k and assume an 8% compound interest rate of return for 30 years, your bank account would be worth $561,416 at the end of year 30. If you made the same investment in a non-tax sheltered environment (a fully taxable account), assuming a 28% tax rate, it would be worth $373,985 instead of $561,416. This is a whopping difference of $187,431.

C. Tax Deductions – Certain IRAs and 401ks allow you to reduce your taxable income today while saving for your future. For example, if you contributed $5,000 to a Traditional IRA this year, and if you meet qualified income levels, you are eligible for a $5,000 tax deduction when filing your tax return.

D. Protected from Creditors – IRAs and 401ks are afforded protection from bankruptcy through the Employee Retirement Income Securities Act (ERISA) under the US Department of Labor and thus generally are shielded from creditors in bankruptcy proceedings.

E. Wealth For Future Generations – Some types of government sponsored savings plans allow the passing of assets to beneficiaries after death while avoiding taxes. This benefits your family’s financial future by leaving valuable assets to your loved ones without the burden of taxes. This has been under some scrutiny recently since the government is trying to generate revenues in the current economic downturn.

Each government sponsored savings plan possesses unique tax advantages to maximize your future wealth and each has unique eligibility requirements. It is important that you figure out the right plan for you and start saving in order that you may enjoy the benefits of your retirement years.

What is a Fiduciary?

I wanted to talk about the real story on who is a fiduciary and who is not. In the financial services industry, there are brokers and there are advisors. There are people who sell products and there are people who sell knowledge. There are people who look out for commissions and people who look out for you. This is the fiduciary difference. Is your advisor held to the fiduciary standard? Because he or she should be.

A fiduciary is someone that manages money for the benefit of another. A fiduciary is bound by law to place the interest of its beneficiary first – before the fiduciary’s own interest. You would naturally think that anyone giving financial advice would be a fiduciary, but you’d be wrong. Stockbrokers, registered representatives, and most people that call themselves financial advisors (the term is used very loosely) are not fiduciaries even though they are engaged in marketing themselves as financial advisors. Unfortunately, only a small proportion of “financial advisors” are federally or state-registered investment advisors. Most financial advisors are considered “Broker-Dealers” by the United States Securities and Exchange Commission (SEC).

A Registered Investment Advisor (RIA), subject to the Investment Advisors Act of 1940, is a fiduciary. The legal investment advising standards that govern a non-fiduciary stockbroker and a fiduciary RIA are very different. A non-fiduciary stockbroker only has to follow a “suitability” standard, which doesn’t require the stockbroker to place the interest of the client above his own. The stockbroker only has to provide “suitable advice”.

A RIA ,on the other hand, must follow the highest known standard in law which is the “trust” standard. The RIA is required by law to place the interests of its clients before its own and fulfill critical fiduciary duties of trust and confidence. The RIA must provide its “best advice”.

A stockbroker owes fiduciary duties to its broker-dealer, not to its investment clients. In fact, they are required by federal law to act in the best interest of their employer, not in the best interest of their clients. A RIA owes fiduciary duties to its investment clients only. The critical point made is that an RIA is subject to the high fiduciary legal standard when providing investment advising services while the stockbroker is not.

There are three types of compensation. The first is fee only. This model minimizes conflicts of interest. A fee-only financial advisor charges clients directly for his or her advice and/or ongoing management. No other financial reward is provided, directly or indirectly, by any other institution. Fee-only financial advisors sell only one thing – their knowledge.

The second is fee based. This popular form of compensation is often confused with fee-only, but it is very different. Fee-based advisors earn some of their compensation from fees paid by their client. But they may also receive compensation in the form of commissions or discounts from financial products they are licensed to sell. Furthermore, they are not required to inform their clients in detail how their compensation is accrued. The fee-based model creates many potential conflicts of interest, because the advisor’s income is affected by the financial products that the client selects.

The third is commission. This type of advisor is not paid unless a client buys (or sells) a financial product. A commission-based advisor earns money on each transaction—and thus has a great incentive to encourage transactions that might not be in the interest of the client. Indeed, many commission-based advisors are well-trained and well-intentioned. But the inherent potential conflict is great.

Bankruptcy Basics

Sometimes you will buy a note and the person is in bankruptcy or they file for bankruptcy while you are in the middle of trying to do a workout with the homeowner. This is why it is important to understand bankruptcy and how it impacts your note and profits. This post will deal with an overview of the different types of bankruptcy you will encounter and later post will deal with question on how bankruptcy can effect your exit strategy and how you deal with such situations.

The two most common forms of personal bankruptcy are Chapter 7 (CH7) and Chapter 13 (CH13). A chapter 7 bankruptcy is designed to “wipe out” unsecured debt and allow an individual to start over with a clean credit history. In the case of a chapter 7, unsecured debt – usually credit card debt – is wiped out and therefore you are no longer obligated to pay the debt. A chapter 13 bankruptcy is designed to “reorganize debt” for a specific amount of time. The debtor has the ability to repay their debt over time (typically 60 months). They get on a repayment plan that usually consists of a large monthly payment that is dived out to creditors in amounts decided by the courts. Depending on the state and the bankruptcy district, the mortgage payment may be paid through the BK trustee of directly to the lender.

In most cases, the secured debt remains attached to the property, even in the case where a bankruptcy has wiped out all unsecured debt. There are exceptions. The first always remains attached to the property and in most cases the second mortgage as well. If the property has negative equity on the first mortgage then there is a chance that the second mortgage can be stripped in bankruptcy. Further details on lien stripping and cram downs in future posts.