All Forum Posts by: Rob Cee

Thanks every one for such excellent and informative answers on this thread, much appreciated.  One thing I do not like about trust deed lending is you have to pay ordinary income taxes on the interest income if you use non retirement cash to invest.   Even with a decent chunk of money lent out at say an average of 10% over 12 mos, the NET after tax income is smaller then you would think it would be.  I do think it is a great vehicle for retirement funds since you do not have to realize the tax on the interest income, especially if you can re-invest the interest income and get the effect of compounding.

I'm curious of others opinions on investing in the funds many hard money lenders offer vs. just lending your money on one-off individual trust deeds.  

The advantages of the fund:

-doesn't take any of your time at all, it's invest and forget about it (can be time consuming to do the due diligence on every trust deed)

-monthly interest paid can be reinvested so interest compounds

-your money is always earning interest vs. when you lend on individual trust deeds your money is not earning any interest when a loan pays off and you are looking for the next loan while 

Disadvantages of a fund:

-you lose control and you are putting your trust in the judgement and skill of the HML making the loans in the fund

Any other opinions on this?  Anyone out there ever invest in these funds?

I was interested to see if people interested in or doing the note business would be interested in starting a regular group to meet and discuss the note business.  Experienced or new note investors.  I think having some background in real estate investing would be good for those wanting to meetup.

On another note, I have seen over the past few years it getting more difficult to find good low risk high rate trust deeds to lend on. I'm pretty picky so I pass on a lot of stuff. There is a lot of money out there looking to be lent and fewer deals. And the deals are getting hairier, less just cosmetic REO or SS flips and more major gut rehabs with additions, new spec home construction, etc... Or people with horrendous credit or some issue. I also think there is more risk now because of the run up in prices the last 2 years. I don't like these because with my style of investing I do not go see the property personally or meet the borrowers, and I wouldn't want to get into the hairy stuff unless I was much more involved (which I don't want to be). Also bigger national hard money type lenders are getting a lot more liberal with lending guidelines. I just saw a true stated income loan product being offered by a large national lender for investors that goes to 70% LTV, requires zero income documentation, no 4506 required to be signed, no limit on the amount of other properties owned, and rates are in the 7% range. No way to compete with those rates as a trust deed lender. The question will be where to invest my money next if I can no longer find trust deeds I'm comfortable with? I'm not a big fan of the stock market and the really great deals on rentals seem to have mostly passed.

Thanks for the explanation Dave, that is good info.  So Dave you are saying, if I went to you to get a hard money cash out refinance on my rental 4-plex and I checked the box on the 1003 that I do NOT plan to occupy as my primary residence, but then I went used the cash out proceeds to go to Hawaii or have my grandma move into one of the units, that trust deed your originated is now considered a "consumer loan"?   And what are the consequences for the lender for that being a consumer loan?  Can you point me to more info on that specific law somewhere?

The point I'm trying to make is, if a mortgage loan is underwritten and funded based on it being a investment property mortgage (whether that is a hard money lender or Wells Fargo, Chase, BofA or whoever making the loan), I do not believe a borrower can just "move in", or use the cash out proceeds to go to Hawaii, or move their grandma in, and all if a sudden make it the loan flip to being under "primary residence" consumer laws.  

 Yes but the loans funded by Wells (or any lender) that are owner-occupied and non owner occupied are subject to different consumer rules and regulations.   For example in the state of CA, technically a primary residence purchase loan is "non-recourse" and a investment purchase loan is "recourse".  Investment property loans are also not subject to a lot of the Dodd Frank rules.  As far as I know, an investment property mortgage is an investment property mortgage, whether it is originated and funded by Wells Fargo and assigned to Fannie Mae, or originated by John Doe hard money broker and funded by Jane Doe investor.  They are subject to the same rules as far as I know.  

OK let's take a hypothetical situation here. I have a rental house and I go to Wells Fargo and do a cash out refinance on that rental house on a investment loan program parameters, and I check the box on the app that I do not plan to occupy the house. But I change my mind 2 weeks after closing and move in. You are saying when I default and Wells Fargo goes to foreclose, I can make a claim to Wells Fargo that this loan should be foreclosed upon due to guidelines regarding a primary residence and not and investment home (there are different rules for example in CA how and when you file a NOD on a investment vs. a primary residence)? You are saying I can go back to Wells Fargo and argue that this loan should be non-recourse (not recourse as all investment loans are) because I changed my mind after closing and moved in? I'm not sure I buy that. Then what would be the point for having different laws at all for investment mortgages vs. primary residence mortgages if someone can just "move in" after close even though they stated it was an investment property on the application, got an investment loan, and it becomes a primary residence loan? And I'm not sure I buy that if I go to Wells Fargo and get a cash out refi on my rental 4-plex, check the box that I won't occupy on the app, and use the cash out proceeds to go Hawaii, and all of a sudden this becomes subject to "primary residence" laws in terms of Dodd Frank, Qualified Mortgage (QM), recourse/non-recourse, foreclosure laws, etc.... That is hard to believe.

Thanks David.  No I think I'm fully confused on this one, not sure we are on the same page.  I would have to talk to a mortgage attorney to have them explain it to me to get more clear on this one.  As far as I knew, they check they box on the loan app that they aren't going to occupy the property, it's an "investment loan" no matter what they do with the loan proceeds, period.  And thus is not subject to "primary residence" consumer mortgage finance laws, period (the laws are different for primary residence and investment property mortgages).    I am talking about a purchase money  trust deed here, how could they use the funds to take their family to Hawaii instead?  Even on a cash out refinance on a non owner occupied rental property, if a borrower states that they are not going to occupy the property it is considered a" investment loan" in terms of mortgage consumer laws, no matter what they do with the cash out proceeds.

 I guess I'm confused then.  I thought it was clear cut, if they check the box on the loan app that they do not intend to occupy the property, then it is considered a non-owner occupied loan not subject to the consumer laws of primary residence loans.  If you go out and get a conventional fannie/freddie investment property loan from Wells Fargo or anyone, the only thing they have in the loan file to document you are not going to live in the property is the box that is checked in the declarations section of the 1003 loan app.  They don't even require any statement of business purpose or anything like that.