Vested Interest: Protect Equity

Vested Interest: Protecting Equity

Category : Blogs

Vested Interest is a Strong Qualification

Today I’d like to talk about vested interest, and why bridge lenders look to this as a primary qualifier in moving forward. As a commercial bridge lender, I want to see how much skin you have in a deal.  I lend money based on the reality that the borrower has much to lose if they fail to use the money properly. Vested InterestBased on my past experience, those who have real equity in their property will climb mountains in order to maintain and improve that equity position.  They pay attention to the cost of their money, as well as the results of money spent.  This inevitably leads to a great relationship between the myself and the borrower.  Remember, my interest is in pursuing a rate of return on money lent. I’m uninterested in developing a real estate project or business endeavor in order to protect my interest.  That is the borrower’s job.

Speculation Yields Poor Propositions

I had a call yesterday, whereby the caller/borrower had a primary lender who was willing to lend 70% of the value of the property. Additionally, she needed someone to lend the shortfall of 30%.  According to her, the property was undervalued by 30%, and the after repair value Speculation Lendingwould double the value of the property. Nonetheless, I have no interest in these types of deals as they are built on pure speculation.  I also have no interest in being a prime lender at 70%. My borrowers have to have adequate skin in the game to be approved. My security is in knowing that repayment is the only viable option.

Certainty Provides Mutual Benefit

A good bridge lender will always lend money based on the certainty of repayment.  Given that I lend my own money, I always look for loans whereby the borrower’s number one priority is to protect the value of their equity.  Above all, this is the hallmark of a borrower I want in my portfolio of investments.

My feelings on the subject.

Nathaniel S. Fulford

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A Hedge Fund Image

A Hedge Fund Phone Call, a Lesson in Liquidity

Category : Blogs

Liquidity Enables Longevity

I had an interesting call yesterday that I’d like to share.  A hedge fund asked if I would be interested in purchasing a note for approximately 3 million.  The first question of course is what is the value of the collateral asset securing the loan? The answer was 10 million. Follow-up question, what is the current rate of interest? At this point, the note was carrying a 29.5% default interest rate.

What does that tell us?

A Hedge Fund Cartoon

In layman’s terms, the equity of the property is your monthly compensation.  You have to ask yourself, given the amount of return and the asset securing the return, why would you move to push this asset off your books? The answer is simple, while you’re showing a phenomenal rate of return on your income statement as well as an increase in your equity on your balance sheet, you’re also carrying a non-performing asset.

So, your next logical question is what is the cost of holding the asset?  In this particular case, it was 10% (i.e. the investors were guaranteed a rate of return of 10% a month whether the asset performed or not). This to me, sounds like a manageable and highly profitable event provided your portfolio of notes by in large are performing. I’m in the business of lending liquidity, and in order to do that, I have to have liquidity. Phenomenal returns and increase value are great provided you have the liquidity to see the investment through. Trading liquidity for high return non-performing assets can cause a reversal in your high profits and book values as you look to liquidate holdings in order to regain proper liquidity.

Food for Thought

Nathaniel S. Fulford

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High income vs Wealth

Are You High Income or are You Wealthy?

Category : Blogs

There is a Big Difference Between High Income and Wealth.

The big difference is that one works for you, and the other you work for.  Wealth is nothing more than the accumulation of assets that work for you.  High income to a large extent, leads to the acquisition of assets that you work to keep.  In other words, you work for the bricks and mortar of your nice home.  Acquiring assets that work for you overtime gives you a sense of security within yourself.  Knowing that your assets wake up each morning; ready to go to work, with the only expectation of making your life more plentiful is a great feeling.  So how do we acquire the assets that work for us?  The first rule is stop purchasing assets that we believe achieve the illusions of success.  The second rule is to acquire assets that generate more than their cost.  Real estate if purchased and developed properly will not only pay for itself, but it will pay for you as well.  Properly leveraging this asset can not only create immediate income, but it can provide future income as well.  And the good news is that it will always be in the same location, ready to go to work.

In a Nutshell

The success of an economy built on the formation of capital known as real estate, over time will take on an existence by itself.  It will grow in perpetuity, and not only give you a great future, but also provide a future for generations to come.

Food for Thought

Nathaniel S. Fulford

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short term bridge financing picture

When to Use Short Term Bridge Financing

Category : Blogs

Short Term Bridge Financing

First off, lets define our terms. Short term bridge financing has a one to three year term followed by a balloon payment.  Given this criteria, time is of the essence.  You can’t afford (no pun intended)  to be indecisive. In acquiring short term bridge financing, you’ve traded equity for liquidity on a short-term basis.  You want to use the liquidity to increase the value of the asset more than the cost of the liquidity.

Watch out!

A common misconception of inexperienced investors is the assumption that an acquisition of 30% less than estimated market value generates an immediate net gain.  However, in actuality the cost to arrive at this estimated market value can easily exceed 30%, if you fail to properly assess the cost of the rehab.   That is why I can’t impress upon you enough, how important it is to do your due diligence/homework (i.e. rehab. cost, sale or rental income, carrying cost, probability of refinance on additional short term or long term basis,  etc.)

Trading equity for short term liquidity can greatly increase your net worth.  Use the money soundly, and realize time is of the essence.

Food for Thought

Nathaniel S. Fulford

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hardmoney lending speculation

Hard Money Lending vs Stock Market Investment

Category : Blogs

Of Assurance and Speculation

 

The Macro: Stock Market

Speculation to me is nothing more than glorified gambling. For example, people buy stocks because they believe they will see a healthy rate of return due to a perceived inevitable increase in value. The question is, by what mechanism is said value being being ascribed? How does one value a partially intangible asset properly? The stock market operates on a macroeconomic scale. It requires you to fully understand the nuances of millions of moving parts and guess which variables will be the most consequential.

Hard money lending vs Stock market1

What you typically find with people discussing stock is a couple of talking heads giving opinions on which of the many causes they believe the main cause of a major dip or a rise to be. Just like in a casino and for similar reasons you are very unlikely to be a winner.

The Micro: Hard Money Lending

The business I do in hard money lending is quite a bit different. I assess individual tangible assets. I then use reliable market data to ascertain a price point at which it makes little sense for the borrower to default. These evaluations are what I would classify as a microeconomy. A microeconomy has few moving parts and nuance to understand after the initial groundwork is done.

For example, I use real estate to securitize my loans because it’s hard money lending picsomething I am able to accurately evaluate the value of (via location, income stream, size, amenities, tax records, etc). From there I simply adjust my price point before a deal is struck. The degree of uncertainty in this hard money lending strategy is astronomically low. To this day I have not had to foreclose on a single client. This is because I qualify the value of assets with enough leeway for my evaluation to be off by a bit. After all, what if I over speculate?

The Point

I don’t want to be in the speculation business. I want to be in the business of assurance for the sake of the customer, and my sanity. Riding waves or building in  bubbles are an open invitation to a stress aneurysm. It’s an important distinction between micro and macroeconomies, the feasibility of reliably calculating the outcomes of each business interaction.

Food for thought,

Nathaniel S. Fulford

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