Check out my Business Plan idea! Feedback Wanted!!
So I'm in San Antonio (SA) and am currently doing a rehab. I originally was going to wholesale it and advertised it online but decided to partner with a seasoned SA real estate investor. Well a lady called me and asked was it still for sale and I had to let her know it wasn't because we are rehabbing it. She then proceeded to tell me that she was looking for an owner financed property and had $25K to put down. I was shocked by the amount she had down and wished she would have contacted me prior to me agreeing to partner and do this rehab. I know owner financing is hot in SA. Then it hit me... What if I did the following:
- Target properties under $100K
- Use investor's IRAs to buy properties cash (that would avoid Sub 2 risks)
- Pay them 8% ROI
- Place their note in first position
- Do a WRAP with a 10% note and I'll be in second position
- I'll keep the down payments made by the buyer
- Once the investor's note is paid off, I'll get the full value of the note until I'm paid off
Example: Use investor capital to buy a house worth $50K. Do light rehabs/cosmetic upgrades (if needed) and sell it via owner financing for $75K and require, let's say a $15K down payment (I know folks that are doing that right now that don't do any repairs). Investors note $50K at 15 years at 8% interest would be $477.83 monthly (principal and interest). My note will be $60K at 25 years at 10% interest which will be $545.22 monthly. Total interest paid to the investors and I would be $103,566.21
I made $10K putting the deal together, cash flowed $65 a month for 15 years, then $545 for the remaining 10 years, and it's much cleaner then doing a Sub2 deal.
Contingency: Have 3 months saved in case we have to evict the tenant and cover the mortgage payments. Have an attorney and all legal documentation in order.
- Use investor's IRAs to buy properties cash (that would avoid Sub 2 risks)
You only avoid sub to risks if the investor making the loan agrees. I, for one, would not. Nor would I make a 15 year, 8% loan out of my IRA. Maybe you can find folks who will, but that's a long time to have money tied up.
@Jon Holdman Thanks for the feed back. What would be more acceptable in your view? 10 years? According to Bankrate, last year the average ROI on IRAs was 7.3%.
And the investors would have full disclosure.
First I would say I love the concept and the thinking outside the box that you are doing that is what really fuels this industry. I would do your best to keep those juices flowing.
Saying that, I agree with @john holdman, I think finding people with IRAs wanting to lend 50k for 15 years at 8%. I am not saying that it is impossible and I don't want to throw water on your creativity but I think it would be difficult on finding those types of IRA lenders.
Lastly it is your business and your dreams so if you can make it happen then I would be stoked.
Best of luck
Andrew
@Andrew Cordle Thanks Andrew for the encouragement and words of wisdom. If you were presented an investment opportunity like this what would we your appetite. Also, do you think you feel that way because you viewing it through an investor's eyes versus the normal mom and pop IRA/401K holder?
I am currently funding home 50% LTV for 5-year note from my IRA. If you can make the number work similar to this arrangement I think you would have a larger customer base.
I think it maybe doable, but I think you are probably looking for some small, non active, mom an pop IRA person. Which again I think you could find some but it is a little hard to find those people then convince them to invest in RE.
Plus the other thing you have to consider, is that you most likely will have to find many many many of these smaller mom an pop IRA investors. That part of your marketing plan would never really stop it would always have to be looking for IRA investors.
The concept maybe a good idea but I would be worried about keeping the engine running with enough IRA investors. Just my two cents. Again, I think you are on the right track just keep going down it and figuring it out. That is what REI is all about.
Andrew
@Eric Moore My 2 cents. You're not aligning your goals with your investor goals. You're taking the cash and moving on to the other deals while the IRA investors wait for their returns.
If I invested my money with you then I'd want most of the down payment and a piece of the interest on the loan. This gives me multiple outs if I need evict or liquidate the investment.
@Jerred Morris I appreicate your feedback. My goal would be to stay attached to the deal throughout the transaction because I have a note as well. If an eviction needs to happens my company would take care of it and of course inform the investor.
I just thought it would be good deal given the interest rates of IRAs and I would either meet and/or exceed the average returns. Ill go back to the drawing boards some.
Originally posted by @Eric Moore:
@Jon Holdman Thanks for the feed back. What would be more acceptable in your view? 10 years? According to Bankrate, last year the average ROI on IRAs was 7.3%.
And the investors would have full disclosure.
I was going to comment asking where you got the 7.3% return, but I found it. Over the previous 10 years ending Dec. 31st 2013, the annual compounded return was 7.3% for the S&P 500.
Since 1970 the S&P 500 has an annual compounded return of 10.6%.
I would be looking for a "premium" to that return. Just as banks require, the longer the term the higher the interest rate premium.
From a risk standpoint, the chances of you (or anyone of us individually) defaulting are MUCH greater than the risks of holding an S&P 500 index fund.
I don't want to invest in something that is significantly more risky with equal or lower upside.
I agree with @Kurt K. To tie up money for 10-15 years, I think I'd expect a very nice return, even as a mom/pop investor.
I'm not at all convinced the S&P is going to return a compounded 10.6% return over the next 10 years. Further, I'm not going to put 100% of my funds into any one investment, so my aggregate rate is likely to be (has been) less that 10%.
OTOH, I do have money invested into making real estate loans. That's paying around 12% on average. Those are short term loans, 6-9 months. That's in a pool, so I could get many money back on fairly short notice.
Its the 15 year term I find scary, with no chance of getting out if I need the cash. With this investment, the investor is locked into the long term with very little ability to cash out. Even a bank CD lets you out, with a penalty. Private placements are often illiquid investments. This is even more so. The only hope for getting cash back is to sell the loan to another investor. That's likely to involve giving a discount. That is, I will lose some of my principal if I sell the loan to a note buyer.
Further, as soon as you sell the property and put a second lien on it you weaken my position. If I'm in first position with no other encumbrances and I don't get paid then doing a deed-in-lieu is an option. With other encumbrances, that goes out the window and I have to do a full blown (expensive) foreclosure to wipe out those seconds and either get paid off or get the property.
If you're continually marketing to find new investors you need to be careful not to run afoul of securities laws.
Now, all that said, I think you will find some IRA holders who are willing to make loans at 8%. There is a LOT of cash sloshing around right now earning only 1% or even less. If you're really willing to deal with the SEC and state entanglements, and all the laws around originating residential loans, it is possible to start a pool, use that to buy houses then sell them with owner financing. Do realize that advertising is still very limited. Promoters of such pools are limited to people they personally know for investors, or strictly accredited investors. Public advertising of the investment is a further step up on the complexity scale. I do know someone who's working on doing that, and it is a BIG job to do it right.
@Kurt K. @Jason C. @Jon Holdman Thank you all for that great advice. This is why I love BP because there are so many things I leaned from interacting and reading. I'll take all of your recommendations into consideration.
Jon as far as advertising I was simply planning to work with the local self-directed IRA service. They are looking to find ways they can deploy their clients capital. That way I wouldn't have to worry about violating SEC laws (well that's my assumption).
Originally posted by @Eric Moore:
@Kurt K. @Jason C. @Jon Holdman Thank you all for that great advice. This is why I love BP because there are so many things I leaned from interacting and reading. I'll take all of your recommendations into consideration.
Jon as far as advertising I was simply planning to work with the local self-directed IRA service. They are looking to find ways they can deploy their clients capital. That way I wouldn't have to worry about violating SEC laws (well that's my assumption).
I completely agree with you Eric. I love BP for those same reasons. I have just been following this topic in order to gain knowledge because I loved the thought process you put into your idea, but I didn't have the experience to help you develop that idea further. But, just by following this thread, I have gained a lot of additional knowledge.
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The % is not the big problem (although, it is a problem at 7.3% for this amount of risk). The big problem, as many have mentioned, is the term - expecting people to make a 15-year investment from their IRA. And I don't think it has anything to do with large or small IRAs...
Most IRA investors, I'd guess, might buy 5-year notes or things like that with a short-term back to liquidity. And most IRA investors seek to reduce risk through diversification.
I'd rather buy an S&P Index Fund - which is highly liquid and rides with the S&P - than risk my IRA bucks on a 15 year note held my a single mortgagor and secured by a single piece of real property.
I'm not raining on the parade here - I love creative financing. Just not sure how attractive the deal would be for IRA investors...
Your idea has merits but I would play with numbers some.
For example, if you borrow 25k at 8% for 60 months then the payment would be ~$506.91
If you sell at 75k with a 25k down payment at 9.99% for 204 months the payment is ~$510.29
You get the back 144 payments for free, $104.098.90.
Note, if you seller finance you will need to pay an RMLO to originate the loan and then have it professionally serviced, these costs are not in my example.
Send me a PM if you want my spreadsheet.