Passive Real Estate Income Through High-Interest Trust Deeds
|Your tired of hassling with tenants, contractors, leasing agents, brokers and attorneys. You have owned income producing property for the last 20 - 30 years, and you’re ready to leave behind the day to day problems and enjoy life. The kids are on their own and you want to travel at will and spend winters in a warmer climate or summers in a cooler one. You only have one problem; if you sell your real estate holdings and invest the proceeds in CDs, your income will be cut by 80% or more. The stock market looks too high and too risky.|
"If only I could replace my monthly income without depleting my nest egg," you think, "and without losing sleep over the stock market."
Well, there is a way to make this happen: by investing in trust deeds, or private mortgages loans. Simply put, trust deeds are short-term loans to real estate investors secured by the value of the real property as collateral. Investors who invest in trust deeds typically make a 12 to 18 per cent return, paid out monthly, with a minimum investment of just $50,000 and relatively low risk. As a result, they are able to enhance their lifestyle significantly without threat to their principal, or built a large nest egg, safely, in a relatively short period of time.
Case in Point
I'll give you an example: my wife's parents. My father-in-law has had a couple of concerns. First, he's significantly older than his wife--he is 77, she is 65. Second, women have a longer life expectancy than men. Statistically, my mother-in-law will live 13 to 15 years beyond my father-in-law. My father-in-law has an old-fashioned Sears pension which cuts in half when he dies, and Social Security, which also cuts down by about one-third when he dies. These diminished resources would fail to provide adequately for my mother-in-law.
The two of them decided that they needed more income, or some way to increase their capital base. At the time, they owned an apartment complex in Alvin, Texas, which was a good investment, but wasn't producing any income after the expense of vacancies, repairs, management, and so forth. So they sold the apartment complex and invested the proceeds in three different mortgage liens through my company. From the $200,000 they invested, we created a monthly income of about $3000. We did a projection showing that over 13 years, we'll be able to replace every lost dollar of pension income and social security income, should he pass on first, double the principal in real terms.
In addition, my in-laws can now live higher than they did. In fact, they just decided to take a $10,000 trip to Europe, rather then the usual $2,000 cruise out of Galveston. They're glad they didn't opt for Plan B, an annuity, with a return of only 8 per cent and the guarantee that when you die, you'll lose your total investment. Now my in-laws have a 14 to 18 per cent return, plus their original investment.
How Trust Deeds Work
Private mortgage loans are never greater than 65 per cent of the appraised value, secured by income producing property only (apartments, homes, office buildings, warehouses), and only made on investor property. A lot of notes on the market are connected to primary residences. With Texas homesteads, for example, there are many different laws involved, many of which benefit the borrower. Most mortgage companies originating private mortgages lend only to professional real estate investors, not owner-occupants of residential properties, thereby by-passing the problems with homesteads. The companies make a profit by charging borrowers origination fees for the loans, while the investors collect all the interest.
We personally examine and select properties carefully to make certain that they truly are worth the appraised value. We look at the property as much or more than we look at the borrower, knowing that the property will always be there. Property doesn't get divorced, property doesn't declare bankruptcy, property doesn't have financial problems. Property is the basis of wealth in the United States, in nine out of ten families.
Should we have to foreclose, we can sell the property at 10 or 15 per cent off and still make a profit. We can put it on the market at 25 per cent off and still make a profit. But defaults are rare. Our portfolio for the last 20 years shows a 4 per cent default rate. When a default occurs, the mortgage company picks up the slack. They’ll handle the foreclosure, any property rehabilitation necessary, and the property sale.
Many of my clients start with a small portion of their portfolio to see how it works. Once they put in an initial $50,000, and it works real well, they're eager to invest a greater amount of money because their comfort level rises. They receive the monthly income checks, become familiar with the process, all the safeguards that we use, and then they call me up and say, "Do you have anything else available?" Over the course of time, they increase their investment to a point where their comfort level meets their income need.
The risks are fairly limited if solid procedures are followed. All mortgage documentation will be standardized by the mortgage company originating the loan, so the investor will know that the mortgage note and deed of trust are drawn up to his benefit.
The risk is going to be somewhat higher than government insured money market funds, or government bonds. But it will be substantially lower than stocks, gold, silver, or any assets that you hope will increase in price--assets that could go up or down in value.
An Individual Decision
Deciding how much of your portfolio might ultimately go into mortgage liens is an individual decision. I personally have 75 to 80 per cent in mortgage liens, which represents the proceeds from the sale of my automotive business. Before I became actively involved in the private mortgage business, I was an investor, looking for a way to replace the income from the business with a less time-intensive instrument. I spent two years researching the possibilities. My father-in-law has 50 to 60 per cent of his portfolio invested in mortgage liens through our company. It depends on the size of your portfolio, what you're trying to accomplish.
I can't recommend mortgage liens highly enough. I've studied finance and investment for many years, have been an investor in many different vehicles, and it's all a trade-off between risk and return. The mortgage lien, when properly executed, is absolutely excellent; I don't know any investment available to the public that has that match of investment return versus risk.
You may hear about people who go into venture capital funds and make 40, 50 per cent, but most individuals can't take part because they don't have the minimum investment--usually one million dollars or more--required. Minimum investment with most private mortgage originators is fifty thousand dollars. You won't make a 40 or 50 per cent return, but you will make a solid, guaranteed 14 to 18 percent, which is superior to most other investments. That amount of yield can go a long way toward making your retirement both secure and more comfortable than you ever dreamed.
If you have any doubts, just ask my in-laws--when they get back from Europe.
|Don Konipol holds an MBA in Finance from the University of Michigan and a B.S. in Economics from the City University of New York. In 2002 he formed the Managed Mortgage Investment Fund LP as a high yield real estate mortgage fund, and serves in the capacity of General Partner. The fund invests in a diversified portfolio of short term, high interest real estate mortgages secured by investment real estate.|
Upon receiving his MBA in 1975, Mr. Konipol went to work for Societe General De Survalliance S.A., Geneva, Switzerland in investment banking. He left in 1978 to come back to the United States and went to work as a commercial realtor for First Equity Company in Houston, Texas. In 1984 Don, formed the Investment Realty Group to purchase distressed real estate at auction.
Don Konipol has successfully invested in numerous real estate deals, operating businesses, high yield commercial mortgages, and REITs. Currently, Don Konipol, invests his capital and client/investors capital in real estate, real estate debt and real estate securities.
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