Busy accredited investor looking for low risk investments

Busy accredited investor looking for low risk investments

Investor · Phoenix, AZ · Member since 2015 · 30 posts · 6 votes

As very busy professional, with accredited investor status,  I want to find a low risk investment preferably passive to park my money in case the market goes south.  According Robert Kiyosaki you can only build wealth in 2 quadrants owning a business or real estate.  I would like to one day own my own business but I am making good money working at my job and I don't want to buy another job.  Being an absentee owner has it risks as well.  In terms of real estate you can landlord, flip, or lend.  These are all time intensive and risky if you don't know what you are doing.

Landlording: SFR or MF One can free up their time by having the property managed take less profit. However PM never treat your property as if it were their own. They are not shopping around for the best tenants, most cost effective repair, making the tenant happy. their in the business of making money at your expense. The tenant does not care about the asset because they don't own it. It is often perceived that he rich landlord is making alot of money of the tenant as the tenant uses/depreciates the property. Then there are the environmental impacts of the environment on the property snow, hail, extreme heat humidity... all the forces of nature against your asset.

Flip: the market across the country has appreciated after the best real estate price drop in history.  Are we due for another correction?  Rehabing has significant risks once you take down a wall and find out all that deferred maintenance has don to the property.  The holding costs continue to build up during these unforeseen setbacks.  With financing taking longer and more difficult, you could go through acouple of buyers and months before you get a sale (day of closing).

Lending:  This looks like the holy grail.  You don't own an asset, your return is predetermined, and no third party involvement.  However, you have the risk of a bad note.  The cost and agony of foreclosure or obtaining the security can be painful.  

If you were an accredited investor not looking for a short term gain but building wealth you can pass onto your kids or God forbid sooner where would you be putting your time, energy, money and focus?  People have asked where you invest 500k or 1 mil.  My question is where would you invest a 500-1 mil that is relatively low risk, diversified and does not require a ton of time.  Ohh and most importantly it has to be legal and one can sleep at night.

2Reply
28 views

Most Popular Reply

Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes
10y

@Sean Colesorry, but this statement contains a common misconception:

That is just not true.  "Risk", when discussing investments, relates to the range of possible returns.  A low risk investment means one with a narrow range of possible returns.  Bank CDs and treasure debt are two examples.  They have a fixed return with effectively zero chance of losing any of the principal.  Real estate, whether rehabbing, rentals or fix and flips, is high risk.  That means there is a wide range of possible returns.  There is the potential for earning a high return.  But that is in no way guaranteed.  It is also possible to earn a lower return than you expect.  Its very possible, even with making loans, to lose some or all of your principal.

I do agree that there is no "low risk" investment that is going to generate any significant returns these days.   If you want no risk of loss of your investment and a well defined rate of return then you're going to have to settle for one or two percent returns.  If you want a chance at a higher return, you're going to have to put your money into a riskier investment.  But with that comes the very real chance of not getting the return you expect.  And a very real chance of taking a loss.

I've made a hard money loan that did default.  Our expected return, had it worked out, would have been 15% on the money we invested.  After taking the property deed-in-lieu, dealing with the code violations and finishing the rehab, and then selling it, we took about a 2% loss.

See this reply in the discussion

26 Replies

Jump to latestLatest
  • Property Manager · Orlando, FL · Member since 2015 · 257 posts · 58 votes
    10y

    You said "Lending: This looks like the holy grail. You don't own an asset, your return is predetermined, and no third party involvement. However, you have the risk of a bad note. The cost and agony of foreclosure or obtaining the security can be painful."

    I know how to mitigate most of the risks! I would love to talk to you about it. 

  • Property Manager · Orlando, FL · Member since 2015 · 257 posts · 58 votes
    10y

    1. Lend out only 70% of the ARV

    2. Make sure to get a Deed of Trust on the property

    3. Create an LLC around the project that is owned by my company. The season we do this is because if the borrower defaults for any reason we can just hire him and pay him to finish OUR PROJECT.

  • Investor · Cincinnati, OH · Member since 2012 · 506 posts · 331 votes
    10y

    We structure the loans that we provide in such a way as to mitigate as much of the risk as possible to the lender. There's a variety of ways to do this, including loan to ARV restrictions, how construction funds are disbursed, how title to the property is held, etc.

  • Investor · Phoenix, AZ · Member since 2015 · 30 posts · 6 votes
    10y

    The downside to lending is you are not building a legacy to pass on to the next generation. In phoenix, we have invested in SFH and have done well but as the market heats up we feel it may be the time to cash in and invest in a safer vehicle. Lending still poses exposure to down side risk. Is the only option a municipal bond?

  • Investor · Cincinnati, OH · Member since 2012 · 506 posts · 331 votes
    10y

    @Sam SmithIf you're looking for 0 risk, T-bills are what you should be looking at.  Even muni's have some risk, as evidenced by their higher rate of return vs. T-bills.  The Risk/Reward curve is real (as you take more risk, you should get a higher rate of return).  We can't have our cake and eat it to - that is, we can't take 0 risk and still expect 15% annualized returns when T-bills are paying 0.55% on 1-year bonds.

  • Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes
    10y

    @Sean Colesorry, but this statement contains a common misconception:

    That is just not true.  "Risk", when discussing investments, relates to the range of possible returns.  A low risk investment means one with a narrow range of possible returns.  Bank CDs and treasure debt are two examples.  They have a fixed return with effectively zero chance of losing any of the principal.  Real estate, whether rehabbing, rentals or fix and flips, is high risk.  That means there is a wide range of possible returns.  There is the potential for earning a high return.  But that is in no way guaranteed.  It is also possible to earn a lower return than you expect.  Its very possible, even with making loans, to lose some or all of your principal.

    I do agree that there is no "low risk" investment that is going to generate any significant returns these days.   If you want no risk of loss of your investment and a well defined rate of return then you're going to have to settle for one or two percent returns.  If you want a chance at a higher return, you're going to have to put your money into a riskier investment.  But with that comes the very real chance of not getting the return you expect.  And a very real chance of taking a loss.

    I've made a hard money loan that did default.  Our expected return, had it worked out, would have been 15% on the money we invested.  After taking the property deed-in-lieu, dealing with the code violations and finishing the rehab, and then selling it, we took about a 2% loss.

  • Investor · Phoenix, AZ · Member since 2015 · 30 posts · 6 votes
    10y

    That's exactly it @jJon Holdman.  The question is what has the best return to risk ratio?   I also look at my financial planner who built a business and his son is going to take over once done with college.  I have not built anything for my kids to build on.  Stocks and equities are not legacy investments.  Maybe passing on a portfolio of cash flowing property is not a bad thing either.  I am torn on where to focus my productive years.  

  • Investor · Cincinnati, OH · Member since 2012 · 506 posts · 331 votes
    10y

    @Jon Holdman, I assure you that I don't have any misconceptions about the risk/reward curve.  I've spent plenty of time studying them when I was in school getting an MBA with a concentration in finance.  Do a google search and read on the Security Market Line and the Capital Asset Pricing Model

    The fact that you lost money on your HML doesn't disprove my point. In fact, it's the RISK of the deal not panning out that you're compensated for by getting the higher return. The risk of default on a US Treasury is effectively 0 (it is considered 0 for SML and CAPM models), which is why the yield is so low.

  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    10y

    @Sam Smith  buy some subway sandwhich shops.. or like a buddy of mine's kid he has 4 papa murphys... and we went steelhead fishing on Tuesday... so he can break away.

    all sorts of business you can create and pass down.. does not have to be real estate

  • Investor · Phoenix, AZ · Member since 2015 · 30 posts · 6 votes
    10y

    With government printing money to boost up the economy, I am not sure if T-Bill risk is zero.   You own the good faith of the federal government.  Additionally, there threat of deflation because of the monetary easing policies of the Feds.  there is an argument to owning the hard asset instead of the note.

  • Rental Property Investor · East Wenatchee, WA · Member since 2014 · 10k+ posts · 16k+ votes
    10y

    The downside of lending for me is that interest is taxed as ordinary income.  I like real estate for the tax benefits.  Do you really need more taxable income?  

    Something I would consider is buying into a syndication from a trusted sponsor.  There are some here on BP.  I wouldn't want interest, but a higher equity stake.  Congrats on your success and good luck @Sam Smith!

  • Professional · San Francisco, CA · Member since 2014 · 876 posts · 301 votes
    10y

    I work in the field of syndications with very carefully chosen Sponsors.  I've written a book on the topic called "Cashing In Tax Free".

    Best- Leslie

  • Professional · Plano, TX · Member since 2016 · 2 posts · 1 vote
    10y

    Sam

    The best investment is a multifamily vehicle that offers preferred returns, short invest cycle 18 months or less, and waterfall returns for each dollar in.  The Equity Partner will process the paper work, due daily or weekly inspections, and sit at the table to assure that your investment is covered along with their dollars.

    You can PM me for additional details, location for the latest opportunity, and the full package can be email to your attention for you to read through. There is a drop box available upon the return of the executed NDA, with the reports, appraisals, approvals, civil and architectural drawings, etc.

    Look forward to hearing from you,  Bruce   

  • Investor · Singapore · Member since 2013 · 1k+ posts · 3k+ votes
    10y

    I would spread it out amongst a few private placement funds. You can divide into flip funds, apartment syndications, Hard money lending funds and Tax liens. The hard work is finding the funds and vetting the promoters. After that its send the check and look at the statements. 

    Upside: Really hands off.Returns will be solid (10-12% or so) but not outrageous

    Downside: . No or limited tax benefits unless its in an IRA. Reduced liquidity. It could take anywhere from 3 months to 2 years to get your cash out.

    I have done exactly that with my money split amongst all the above except the flip fund. I also own rentals and while they provide higher returns and tax advantages, they also demand some ongoing time and attention which like you I find hard to devote!

  • Property Manager · Orlando, FL · Member since 2015 · 257 posts · 58 votes
    10y

    Great post @Account Closed, So good advice. 

  • Rental Property Investor · Rockford, IL · Member since 2014 · 4k+ posts · 2k+ votes
    10y

    @Sam Smith,

    It sounds to me as if you recognize that no investment has "zero" risk.

    That said, you can buffer yourself against risks and minimize your exposure.

    My (RE) investing group has buy-and-hold investors, rehabbers and fix-and-flippers who will offer a first lien position with 12% to 20% interest for short-term funds (acquisition of property, repairs, holding costs during the marketing of the property after repairs, 3 to 6 months).

    We're all connected to a real estate investment education school and everyone has had between 180 hours and 470 hours of education in fundamentals and in REI strategies. They know how to analyze deals and will not contact you about properties they have not vetted as they have learned via their education.

    Send me a colleague request if that sounds at all worthy of your attention. (Hover your pointer over my picture, select the "Connect" option.)

    David J Dachtera

    "Success is not a destination. Failure is not an event. Success is a process, failure is a choice."

    - DJ Benedict

  • Rock Hill, SC · Member since 2015 · 1k+ posts · 597 votes
    10y
    Originally posted by @Isaac Blocher:

    You said "Lending: This looks like the holy grail. You don't own an asset, your return is predetermined, and no third party involvement. However, you have the risk of a bad note. The cost and agony of foreclosure or obtaining the security can be painful."

    I know how to mitigate most of the risks! I would love to talk to you about it. 

    Agree with Isaac here but on a different note there is always risk in any investment. Markets can change fast. Timing can and is everything. Even today things are changing in most markets. Retail sales are moving fast. Rental homes selling way over priced, rents rising faster then incomes.

    Make sure you have way in and way get out. Cover you bases , worst case scenario , what ifs.

    Sure this is a simple answer, but so are most things.

    Alex

  • Rental Property Investor · La Quinta, CA · Member since 2014 · 1k+ posts · 779 votes
    10y

    You can lower the risk as a lender, by doing things like:

    -Only lending at low LTVs
    -Only lending to experienced individuals
    -Only lending to individuals with significant assets and a personal guarantee
    -Only lending on real estate that requires little or no rehab or other work
    -Only lending on cash-flowing assets that would continue to cash flow if foreclosed on

    While this may lower the rate you lend at a bit, I think you'll still find some very healthy returns, since most of the competition is in the higher rate, riskier segments of the marketplace.

  • Property Manager · Orlando, FL · Member since 2015 · 257 posts · 58 votes
    10y

    @Alex Franks I would also add:

    -Only lend on a 1st position loans.

    One thing that we do here at Boaz Capital Group LLC is have the trust deed signed into an LLC that we own and in effect the LLC own the borrowers project. Boaz Capital Group LLC then can hire the borrower as a contractor if he defaults on the loan. He would lose his equity and just get a paycheck from us but this insurers that he finished OUR project. We are mitigating the risks.

  • Investor · Cincinnati, OH · Member since 2012 · 506 posts · 331 votes
    10y

    It seems that OP is looking for a proverbial leprechaun riding a unicorn - this is, a 0 risk investment that pays returns better than junk bonds back in the 80s.

  • Queen Creek, AZ · Member since 2014 · 2k+ posts · 1k+ votes
    10y

    @Sam Smith Personally I would look at buying the front end payments on performing notes backed by Real Estate.  Advantages are:

    -  The person selling the note has already done the bulk of the work to find and vet the asset.  You will want to make sure it meets your criteria but the hard work of procuring the asset has been done and if you have a good partner then most of what you are looking at will fit your model.   Otherwise find a new partner.

    -  Because you are only buying a portion of the loan your ITV is low and you should be well collateralized.

    -  Because the loans are amortizing you are getting a portion of your principle back every month, thus your risk is reduced as payments are made your ITV improves every month.

    -  You can work with the seller to buy multiple loans schedules and "ladder" the maturity so they come due at different times, thus you don't have everything paying off in one year.

    -  The loan are usually professionally serviced, so you don't have to collect payments, run  to the bank, or call when a payment is late.  The servicer collets payments that are then wired into your account next day.

    -  Your are only buying part of the loan- the seller retains what is left of the payment schedule after you are paid.  They have an option and an incentive to step in if the borrower stops paying and work with them to get the loan re-performing or buy out your interest.  This helps with your objective for passive investments.

    - Notes and partials can be held in an IRA / ROTH IRA for tax deferred or tax free gains.

  • Investor · Phoenix, AZ · Member since 2015 · 30 posts · 6 votes
    10y

    @Bob E.that is an interesting twist on hard money lending.  How does one learn more about this?  

  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    10y

    @Sam Smith  what @Bob E.  describes is not lending.. its buying existing notes. only you buy a certain amount of payments.  pretty simple really...

    @Bob E. are there brokers who specialize in this.. or is it the shoe leather route.. IE chasing down seller carry backs and offering to buy the note and then when discount is too high for seller you back door them with the buying of a partial that is more palatable to the seller vis a vi discount.

    or in other words do people put up partials on the FCI exhcnage or like kind note portals.. I have not looked at those in a few years.. just curious and it could help Sam with a quick place to go check it out.

  • Queen Creek, AZ · Member since 2014 · 2k+ posts · 1k+ votes
    10y

    @Jay Hinrichs There are brokers that specialize in this as well as a fair number of individuals.  We have done a few transactions like this in the past where our buyers found a yield they were happy with and appreciated the passive aspect of this  We hope to do a few more deals this year.  Right now my partner's dad is looking at a one of our notes, he just had surgery and may decide to pass, we will see.  That is the level of confidance we like to have, something we would sell to family.

    FCI recently started doing partials for their investors but I am not sure if there are many on their website.  

    @Sam Smith we have a BP Meetup next week in Scottsdale  Link to meeting info, if you want come buy and introduce yourself I would be happy to share what I know and I promise not to try and sell you anything.  Or if you want to PM me I send you what one of our past deals look like and you can see it it is something you might want to learn more about.

  • Investor · Phoenix, AZ · Member since 2015 · 30 posts · 6 votes
    10y

    @Jay Hinrichs I have never heard of partial before.  What are you thoughts?  Is this safer than taking the full note?  Could you elaborate more? 

    The down side to note is you can not leverage and the borrower can refi you out any time. What are people getting today on HML- term rate and points?

Join the conversationCreate a free account to reply, vote on answers and follow this thread.