Maximize Real Estate Rate of Return

Maximize Investment

Maximize Real Estate Rate of Return

Two Stream Theory

        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.  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 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


Hard money lending speculation picture

Hard Money vs Stock Market


Of Assurance and Speculation

1. 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 macro-economic scale. It requires you to fully understand the nuances of millions of moving parts and guess which variables will be the most consequential.

        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.

2. 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 micro-economy. A micro-economy 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 something 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 macro-economies, the feasibility of reliably calculating the outcomes of each business interaction.

My feelings on the subject,

Nathaniel S. Fulford VI

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