Maximize Investment

Maximize Real Estate Rate of Return

Two Stream Strategy

        I received a telephone call yesterday from a potential borrower,who had a unique way of maximizing his rate of return on real estate.  His strategy involved rental income as well as debt income from his real estate portfolio.  He has managed overtime, to develop a portfolio of rental properties as well as lines of credit on said rental.  His philosophy boiled down to maximizing his rate of return on each and every rental property. 

        Over time, he was able to develop two income streams per rental by extending money from his lines of credit to flippers(people buying investment properties and rehabbing to flip) at a rate of return of 18%.  The cost of his lines of credit was roughly 8%, whereby leaving him a net rate of return of 10%. The average on his rental properties was roughly $1750 per month, and his average line of credit per property was roughly $100,000. This allowed him to rent the line of credit for approximately $10,000 per year resulting in an additional income stream per property of roughly $833 per month.  Now instead of making $1750,he is making $2583 per month on the exact same property.  

        I’ve always been fascinated in the different ways people approach the development of income streams, and this is a classic example.  This guy not only used the rental income of his real estate, but he also used his equity position gained from the development of his real estate and managed to put that to work. I guess it holds true, the reason some people make money with real estate, while others see it as an albatross is predicated in their ability to see how income streams can develop. 

        To be a good asset manager, you must realize the potential of the asset as well as how to move forward in order to maximize your real estate returns safely.  The good news, if you’re successful, your real estate will always be in the same place and willing to produce without any additional expectations.  Making fora great relationship in perpetuity.

– Nathaniel Fulford V

Borrowing Money

Borrowing For Your Business Investments

Equity       for      Liquidity

        When using equity based financing, you’re merely trading equity in your real estate for liquidity.  In doing this, the cost of this liquidity usually ranges from 10% to 18%, and at least with us, you have no prepayment penalty.  Given that, only borrow what you need and have a viable exit strategy.  This is not a long term financing strategy. It is only a short term bridge to refinance or sale your property at a developed price. Good investors stay away from using borrowed money to finance their personal consumption.  Always work to keep the cost of your debt to a minimum, and always tell yourself time is of the essence. 

Keep in Mind the Cost of Money

         The difference between a successful borrower and one who solves crisis by postponement is the amount of time used to move out of a bridge loan.  Always take the time to evaluate the cost, as well as the time frame necessary to complete your project.  Borrowers who pay attention to the cost of bridge loans with a cap in mind, move to extricate as quickly as possible from this type of financing.  Use the money wisely with an end game in mind, and always remember time is of the essence.

Never borrow for personal consumption, and learn to make your investments work for you.  Solving a crisis by deferment is not a strategy, it usually ends with greater problems and less net worth.  And always less time.

-Nathaniel Fulford V

A House of Cards Falling Blog

Building a House of Cards

Pitfalls of Borrowed Money

      The topic I’d like to discuss today is the pitfalls of using borrowed money to replace your income in lieu of developing your real estate.  I made a special trip yesterday hoping to find out why one of my borrowers had stop making their monthly interest payment.  I was unable via telephone calls, emails, letters and text messages to get a response, henceforth a 1.5-hour trip.  Upon arriving shortly thereafter, I was able to touch base with my borrower.  The discussion inevitably led to the question of how come you stopped making your monthly payments?

       The answer was she had decided it was no longer in her interest to keep pouring money into the project, given that her partner was moving forward to litigate the value of his equity and collection thereof.  So here we sit, they have a project that in my opinion needs roughly fifty thousand to complete, and now the cost of their borrowed money has been adjusted to the default rate of interest for failure to meet their monthly interest payment. And now, the borrower claiming the other partner mismanaged part of the borrowed money.  At this point I’m only privy to one side of the story. 

     The sad truth is both parties are looking to profit from this incomplete real estate venture, instead of realizing the importance of putting aside their differences and moving forward to complete said venture. Now the money goes to pay lawyers. The incomplete real estate venture is on the market at a sales price of a completed project, and both parties waiting for a favorable outcome in opposition to their counterparts. Between both parties, they have managed to build the perfect house of cards, and unfortunately in the end, neither party will in my opinion benefit. 

Moving Forward is a Choice

     If they could only set aside their differences long enough to complete the project, I’m sure they would both walkaway with a healthy return on their investment, rather than who is to blame for this failure. Moving forward in life is your choice, so I suggest learning to compromise.  Otherwise, the end result is your own house of cards.

-Nathaniel Fulford V

Vested interest arm

Vested Interest: Protecting Equity

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. Based 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.

        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 would 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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hedge fund maze

A Lesson in Liquidity

Liquidity Enables Longevity

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?

        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, the 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.

My feelings on the subject,

Nathaniel S. Fulford

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