Investor · Fort Lauderdale, FL · Member since 2014 · 6 posts · 2 votes
I have been lending money to RE investors & earning 13% plus points sometimes.
I am curious as to the pros & cons of continuing rolling my investment into other investors deals or starting to build a real estate portfolio myself.
The compounding of $100,000 over 10 years is $ 339,456
Over 20 years its $1,152,308 which for me at 45 is a nice retirement age & would provide a nice income.
What this does not take into account is tax on earnings (I'm not sure how this is taxed), keeping the full amount invested at 13% for 20 years with a steady stream of investors to lend to, inflation & I'm sure there are a bunch of other things..
Building up a rental portfolio will require more work initially, is much more uncertain as to outcomes but will potentially provide larger returns & I'm sure be more interesting.
I realize this is a very broad conversation however I would like to here others thoughts on what they like or dislike about either option.
I like real estate and have over 30 rentals now, but if I had a 13% return I would probably do that right now. The only problem is risk. You can lose money by lending it as well. I started on real estate because of the ability to leverage my money into more, and I could value add to properties. The big appeal of lending to me would be the lack of work. No painting, no drywalling, no fixing leaky faucets or toilets, etc. Maybe to both? Good luck.
I like real estate and have over 30 rentals now, but if I had a 13% return I would probably do that right now. The only problem is risk. You can lose money by lending it as well. I started on real estate because of the ability to leverage my money into more, and I could value add to properties. The big appeal of lending to me would be the lack of work. No painting, no drywalling, no fixing leaky faucets or toilets, etc. Maybe to both? Good luck.
How much control do you have over the other investors deals? I prefer investing in my own properties because I am in control and will make each property a success.
Here is my contribution to this discussion. I think you as many others can do very very well doing HML. But my philosophy is to be a Jack of all trades. I think you are best served knowing real estate investing from all different angles and invest using multiple different strategies. Diversification. I recommend that you create a portfolio of both rentals and notes. I recommend you invest in both residential and commercial. I recommend you lend money and borrow money.
We all know the risks and know of HML and of rentals that have gone bad and people have lost their money. So, sticking to one method is certainly no fool proof technique. But neither is diversification. It just means you know how to deal with every situation. And if you become good in that way, opportunities will come to you that will perhaps give you more than 13% ROI.
Lastly, you cannot learn everything and be good at everything. But you can find others who are master of certain things and put them on your team. Use OPM and OPT (other people's time.)
BTW, you should get more than 13%. The least we take is 36%.
@Jeffrey Rust, it looks like you are getting a good return but it may not be as easy to maintain that return as you suspect. The larger your portfolio grows the more difficult it may be to keep all the funds deployed. There is always some period of time after the funds have been repatriated to your account when they are dormant before they are redeployed. This may be days, weeks, sometimes months. Also, the amount of the loan requests will never exactly equal your account balance so some of your funds will be sitting idle.
As your account balance grows you may lend larger amounts or do more deals at similar amounts. Managing the funds going out and coming back can then be a bit of a challenge. Imagine the difficulties in planning when you have 5 notes outstanding and none of them have pre-payment penalties so the funds can be returned at any time. At the same time you have people asking you if you will be able to fund their deals. It can get a bit tricky.
If you can establish a tax advantaged account, a SD IRA (preferably a Roth) or a Solo 401k you may be able to avoid/defer some of the paperwork and tax issues. I have explored some of the issues involved with lending on my blog here on BP. It is titled "Confessions of a Private Lender". If you read any of the entries and have questions, ask them on the blog and I should be notified. I am happy to help if I can.
I am certainly not a tax professional, but I have read a couple books on real estate investing written by legal/tax professionals. I recommend Real Estate Advantages by Lechter & Sutton. This book is one of the works that opened my eyes to the hidden tax advantages of owning real estate - advantages that you may not be entitled to as a HML.
For example, I assume that your net earnings from lending are taxed at the normal earned income rate. Earned income is the most taxed form of income. Your interest accruing in your savings account is also taxed as earned income. Many savers do not understand this unfortunate fact.
Unlike being a HML, owning investment property has many tax deductions, which act as a tax shelter for your earnings. One of the best of these tax deductions is depreciation. And if you buy rental property using other people's money (OPM) you can gain equity in the property as your tenants pay down the mortgage. You can borrow from this equity later if you would like.
Put bluntly, taxes can and will shatter your dreams of compounding interest. Also in America in 20 years, a $1.1M nest egg will not be sufficient for you to live half a lifetime on...not with inflation ramping up the way it is. I've studied Mike Maloney and G. Edward Griffin enough to know that. You might want to research their works and then you'll understand what I mean.
We structure our agreements as a hybrid model. From the Investor Partner's point of view it is a promissory note and therefore debt instrument with a fixed rate of return. From the Ground Partner's point of view, we are more of a partner in the deal and therefore it is more akin to a joint ventureship.
I do both. Real estate works both within and outside of retirement accounts. Since lending has none of the tax advantages of real estate, I only lend from my retirement accounts, ideally the Roth ones.
Once you exceed $600/yr in interest income, you lose a lot of standard tax benefits (like the child tax credit) from what I understand. You are also taxed at your highest marginal rate in general. As @Chris Soignier!
Great question. As one poster stated, maybe you can do both. I do. What I love about HML is the fact that many borrowers tend to pay off early. This raises your APR yield and can be substantial. I just checked my records and one of my loans ($100K) yielded over 31% APR because they paid it off in less than 2 months. That is pretty hard to beat! However, I have rentals that have appreciated 50% in just over 2 years. If I sell, I can defer taxes by doing 1031 exchanges. Can't do that with mortgages! This is why I do both. You are doing great with your HML and I say keep it up. If you can find a bargain rental property with good returns buy it as well.
100k cash gets me 500k in purchasing power from all of my banks.
Amortize 500k of rentals over 20 years, let the renters pay the mortgage + put money in your pocket as rental income. Refinance in a few years, pull cash out of the homes, buy more. Wash, rinse, repeat.
A lot of people hit on it already, but I really believe the advantage of REI over HML is the aspect of leverage. Put 25% down, deduct interest, gain through appreciation, You also have the ability to defer taxes on capital gains with a 1031 exchange. Although 13% is an nice return, you'd be missing out on a lot of tax benefits that real estate provides.
you didn't say whether your HML activities were tax sheltered. If you can shelter the income with an IRA or 401K then that would IMO be a great investment. However, if no tax sheltering is available, I would be more inclined to buy RE as long term rentals to reap the full tax advantages, hopefully ride some appreciation waves, and have the ability to sell tax free via 1031 at some point in the future. This is why I encourage you to do both if possible. Just read a blog @Dave Van Hornwhere he talked about his progression in RE investing. He started with buy and holds and flips, then progressed into HML, and now buying discounted notes. It's all good:)
Yes. Pay cash, rehab, rent, refinance, and repeat. You can turn that same 100k into as many houses as you can get refinances for. All at 75% LTV or less generating cash flow. It really doesn't get safer in my opinion.
Quick question, I struggle a bit with this BRRR strategy. Say I purchase a property cash for 35K, rehab, rent, and refi. Say the ARV is approximately 140K. The refinance is not money in my pocket, is another 'LOAN' where I can use that money for other properties, yes? I'm sorry, I'd like to may be getting caught up in semantics. I'm reading and reading all I read is 'you get the money back' ...that throws me off completely.