Get Better Than A 5% Return In Investing Environment


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Get Better Than A 5% Return In Investing Environment

  1. 1. ==== ====For more tips on Safe Mortgage Investing go ====You have worked hard, and have invested wisely. You have stocks, bonds, a CD, an IRA andmaybe even a savings account or a money market account. So then, how happy are you with thereturns you are earning from each investment vehicle?As of October 23, 2007, shows a 5 year CD with a 4.65% return, an interest bearingchecking account earns a rate of 2.2% and a Money Market Account shows 3.61% interest. Now,your IRA and stocks may perform better. Maybe you are getting 4 or 5% annually with thesevehicles, hopefully, your return is much higher than this.Now, you might be asking yourself at this point is: Well, are there better returns to be made outthere? The answer is ABSOLUTELY!! Lets take a step back first, and look at the tools we havediscussed so far.What is a stock? It is a basic ownership interest in a given company. Basically, it gives you theopportunity to earn dividends, or payments, from corporate profits. This is a very simplistic view ofstocks. Bonds can be backed by the government and corporations amongst other groups. Theycan be a very complicated investment tool, again, which typically pays a small rate of return. CDs,or Certificates of Deposit are another very common choice in which to invest. Many institutionsoffer them with different maturity dates and interest rates. Savings accounts and interest bearingchecking accounts can also be found at banks, savings and loan institutions, credit unions etc.Finally, IRAs are one of the most, if not the most, popular choice to prepare for retirement. We willfocus on this tool more in a later article.We have spoken about a few of the many investment vehicles available. We all can agree thereturns these are often quite low. So what else is there? What would you say if I told you there is away to get an 8% or better secured return? Thats right, 8% or better is possible. Many times, thisis addition to extra tax benefits you can receive as well. So what is this mystery investment? Directlending, specifically, in real estate.What is direct lending in relation to real estate? It is when you have money available and youinvest it any number of real estate projects with either an equity share partner or as a debt partner.This does not necessarily mean you have to find a property, repair it and sell it, or find acommercial property to buy and hold or reposition. Lets look at debt partnering first.Many real estate investors utilize direct lenders, or private money, to get into various deals. Itcould be to buy a foreclosure property, renovate it and then sell it to any number of end users. Itcould also be an investor buying a multi-family property because of the strong cash flow it willproduce and the direct lending allows the investor to use these funds as the down payment on theproperty. As a debt partner, you will typically receive anywhere from an 8-10% secured return.
  2. 2. Your investment is secured by the property and a mortgage you place on the property. So if youinvested $100,000 with a real estate investor who buys a 50 unit building, with an 8% return, youwill receive $8,000 per year. When the investor sells or refinances the property, you receive your$100,000 back in addition to your annual $8,000 payments.Equity partnering is a little different. First, your investment is still secured by the real estate, butyou participate in the monthly cash flow and receive a share when the property is sold orrefinanced. Lets look at the previous 50 unit apartment building. You use the same $100,000 tobuy the $1,000,000 property, but this time, you would get a percentage of the cash flow eachmonth. In this example, we will say the monthly cash flow after all expenses is $3,000 per month.This number will obviously differ based on the strength of the deal. You put up 10% of thepurchase price, so conventional wisdom would dictate you receive 10% of the cash flow. This mayor may not be the case. Many, many times, you would receive more. Yes, more. As a real estateinvestor, I want my direct lenders to want to lend with me. So I will consider giving a higherpercentage.Lets for the sake of argument say you receive 20% of the cash flow. In this case, you wouldreceive $600 per month. This is $7,200 per year, or, a 7.2% return per year. This is still a goodreturn compared to 4.65% in a CD. However, there are 2 other things to be excited about as anequity partner. First, is your share of "rental losses". Losses, are you crazy? I hear you thinking it,or maybe even saying it!! A quick lesson in taxes is in order.When an investor buys a rental property, the IRS allows the investor to recapture the purchaseprice of the property over a designated period of time. For a commercial property, it is a 39 yearperiod, for residential, including apartments, it is 27.5 years. This is called Depreciation. The IRSalso allows Accelerated Depreciation on the personal property, or Chattel, in the building. Thisrequires a professional Cost Segregation Study to utilize this strategy. Chattel With Us is verygood and you can get them on the web at Now, this depreciation is onthe entire purchase price minus the land value.Now, depreciation is an expense on paper only. You do not write a check for it. However, for taxpurposes, you write it off. This can often times take a rental property and have it show a loss.Again, this is for tax purposes. You can take this "loss", and use it to offset other income. Now,you must ALWAYS consult your tax professional in regards to this. I am not an accountant andoffer no tax or legal advice. These losses are then passed through to the equity partners in directproportion to their interest percentage.The second benefit to the equity investor is a percentage share of the appreciation of the propertyduring the holding period. Lets assume the property goes up in value each year it is held. We willsay for the sake of argument the property appreciates 3% per year. This is many times a veryconservative number, especially when there are "value plays" which allow forced appreciation at ahigher rate in a shorter period of time. So, our $1,000,000 property will be worth $1,159,274 after a5 year hold. This was in determined increasing the value by 3% each year. As the private lender,you would receive 20% of the appreciation, or $31,855.Add $31,855 and 5 years of cash flow totaling $36,000 and the total you would earn over the 5year period is $67,855. Divide this by 5 years and your annual return averaged 13.57%. This doesnot include the additional tax benefits from the "losses" on rental income. These are not pie-in-the-
  3. 3. sky figures. Smart investors are seeing these returns on a consistent basis all secured safely byreal estate.Whenever you are considering where to put your investment dollars, not enough could be saidabout doing your due diligence. This is a mantra for real estate investors and should also be yourswhen investigating any opportunity. So what should you look for? First, you should only invest withsomeone who is in compliance with applicable SEC regulations and rules. This would mean realestate investor has utilized an SEC Attorney to properly adhere to laws effecting the transactionAND is putting your financial interests first. There are a great deal of regulations effecting atransaction such as this. A full discussion of these regulations could not be adequately discussedin this article. You would be best served to only deal with those who comply with these regulations.Second, contact your own legal and tax advisors so they can see what you are doing. Let thesetrusted advisors guide you through the transaction. Next, become familiar with the numbers in thedeal. You will be presented with an offering which should outline the specifics of the deal. Askquestions about the deal. The more information you have, the better decision you can make.There are better ways to invest and with much better returns. Embrace the possibilities and putmore money in your pocket!John Racine is the President of Chattel With Us, LLC a Florida based nationwide companyoffering Chattel Appraisals to real estate investors. He has been investing in real estate for 6years in the Central Florida area. You can contact John or Chattel With Us, LLC at 866-788-4925or or reach them on the web at http://www.chattelwithus.comArticle Source: ====For more tips on Safe Mortgage Investing go ====