Private Money Lending , How to Beat the Madness Part 1

Note: Part 2 is available here

How to Beat the Madness with High, Predictable, and Guaranteed Returns

The stock market has become a field of unpredictable land mines sitting on top of a Dow that looks precariously like another bubble. You rake in an annualized rate of 9% one quarter and lose 4% the next. Then you pay a broker high fees to play a shell game with your hard-earned cash, simply using best guesses to move it from place to place. Half of your profit is lost in the churn.

On the other hand, you can go for safety instead of gambling on high returns and earn (as of July 1, 2015) a whopping 1.25% on a $100,000 Jumbo Certificate of Deposit in your bank. Does that even keep up with inflation? They keep telling us that inflation is virtually flat, but they don’t tell us that they no longer count groceries and gas in the inflation rate. Groceries and gas! That’s a pretty good part of the real cost of living for every household.

We keep looking for that elusive butterfly of high return and low risk, but somehow the banks keep getting richer while our futures keep growing dimmer. You can either bet against the House in the investment casino, or you can give them all your money for a paltry return while they use your cash to get rich.

The truth is, that in order to make a good return, you have to manage some of your own money, away from the feeding frenzy of the shark-infested waters. The traditional channels of investment using the huge financial institutions is no longer a viable option, at least not for all of your resources. Now, you don’t have time to analyze every company on the NYSE and every IPO and then buy all of your stocks directly from each company. And a lot of brokers do a reasonably good job of analyzing the market (while others do horribly). But remember: When your nest egg gets smaller, the money doesn’t disappear into thin air... somebody else gets it. A lot of it goes to hedge fund billionaires and banking institutions that rig the game, bet against you, and then tilt the playing field towards their own overflowing pockets. 

Real Estate Mortgages as an Asset Class

The first things you learn about as an investor are Asset Allocation and Diversification. The basic idea is Don’t put all of your eggs in one basket. So you allocate some of your investment capital to stocks and some to bonds, and then you diversify by selecting various sectors and industries. One route is high risk with potentially high reward, and the other is low risk with little or no reward – but at least you preserve your capital.

Given the perilous state of the stock market and the permanently low rate of return on safe choices, which we will discuss in the coming sections, the middle ground of self-directed investments with solid and guaranteed returns can no longer be ignored. If you are disregarding real estate as an asset class, you may be missing the boat. Real estate investing is the cruise ship between the Titanic and the becalmed barge.

The most overlooked respite in the madness is right in front of you. Just look out your window. The houses that line every street in your community aren’t going anywhere. But, I know – you don’t want to be a landlord. The simplicity and ease of paper investments is worth a bit of a hit to the ROI, right?

Well, maybe. But what if you could be the Banker in the Monopoly game that’s going on all around you? What if you could let other people – experts in the field of rehabbing, managing, and renting properties – do all the work while you just sat back and waited to pass “Go” on the first of each month?

Private Money Lending is fast becoming the preferred investment vehicle for those who want a reasonably high, absolutely predictable, and guaranteed return on an extremely secure investment. These investors are away from the whirlwind where the money flies fast and you pick up the few crumbs that might fall, like kids chasing the candy-throwing float in the parade.

But it gets better than that. With CDs you have to wait for a full year or two before you see any of that horrible return, and you are penalized if you withdraw early. As a first-position lien holder on a commercial or rental property, you get your income every single month – and after a year you get all your money back and can roll it over into another income source. Better yet, if the investor sells the property before the year is up, you collect a penalty from him.

Sound interesting? We will go into more depth later, but first let’s look at the advantages of managing your own nest egg. 

The Myth of a Strong Economy

Throughout most of our history, a roaring stock market was a sign of vibrant businesses and a strong, growing economy. But today’s stock market is not a reflection of our economy at all.

Consider this: The Dow stood at 6,500 when the dust of the economic crisis settled in 2009. In May of 2015 it was over 18,300 – nearly tripling in six years. During that same period, the economy was crawling along at a sluggish pace, “recovering” at a rate of barely 2% a year.

Let’s say your child was 40 inches tall in 2009 and weighed 65 pounds, to represent the 6500 Dow. Growing at the pace of the economy, he would now be 46 inches tall, and (at the growth rate of the market) he would weigh 182 pounds. Is he strong? Or just short and fat?

So, how can that be? There must be some flaw in the calculations. After all, the GDP increased by 4.9% in the First Quarter of 2015. Oh, wait – that was in Kenya. In the U.S. it shrank by .7% as the Dow was rising to its all-time high.

You see, it is not any longer our economic engine that drives the stock market. The financial system has become just another entitled and bottle-fed dependent of the government. The Fed has been printing nearly a trillion dollars of new money every year for the past four years. And every cent of it is funneled though the financial system, which is very skilled at grabbing other people’s money by the fistful and stuffing it in their own pockets as it passes through. They do the same with your money.

In addition, the Fed has kept interest rates artificially low so the banks don’t have to pay much interest on your investments, but they still mark it up quite nicely when they are the ones collecting the interest on “their” money (deposited by you or the Fed).

Here’s a little tidbit of information for you: As we entered the generation of the Baby Boomer coming out of World War II, our financial sector was responsible for only about 6% of all corporate profits. In the 1960s when Bank of America started the now ubiquitous concept of major credit cards, that rose to 10%. Makes sense; we were using more of their money. Then came the bank deregulation of the Clinton administration in the 90s, with the complicity of the Republican Congress. First it was interstate banking, allowing banks to grow huge by having branches across state lines and throughout the country. But the real culprit was the repeal of Glass-Steagall in 1999. This allowed the Wolves of Wall Street (investment bankers) to buy and align with the conservative commercial and mortgage banks in your community. By 2004, just about a third of all the corporate profits in the U.S. were being generated by the financial sector.

Think about what they produce: nothing. They’re just middlemen with sticky fingers. But they control the game. They sliced and diced our mortgages, had Moody’s stamp a Triple-A on them, and our entire financial system, our homes, and our retirements were all flushed away in the blink of an eye.

And then there are the businesses themselves. They have adapted and learned how to play the game. With the highest corporate tax rates in the industrialized world on profits, they have no incentive to expand – especially when the incomes of American households have dropped 10% since 2008 and 93 million people have left the labor force, making “real” unemployment closer to 14% than the 5.5% touted by the government. The cash-rich corporations simply cocoon around their wealth, protecting it while they settle for flat sales – and increasing stock prices.

CEOs have learned how to inflate stock prices rather than focusing on growth and sales and the fundamentals that once governed business. For instance, companies are buying back millions of shares of their own stock. So, with far fewer shares to divide their earnings by, the share price automatically floats upward. The shareholders are happily ignorant, and the CEO’s get a big bonus. So, you pay more for the stock, but the company hasn’t grown a bit. The market roars while the economy stalls.

Those are the forces you are playing with when you bet on the stock market, and there are more and more economic pundits predicting another market collapse every day. It’s a good reason to bet on yourself instead of the usual suspects. 

Note: Part 2 is available here