Second Angel Ira Investment Webinar

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  • 1. Preserving, Diversifying and Growing Assets Trust Deed & Mortgage Fund Investing In Self-Directed IRAs
  • 2. The Current Investment Landscape: Disquiet
    • Fear, seems like nothing but bad news
    • Savings & investments down
    • Real estate values and stock markets down
    • Government policies seem to change by the day
    • “ Another 6, 12, 18 months ‘til it’s over…”
    • How does someone retired, on a fixed income adjust?
    • Whom to trust? Where’s the good information?
  • 3. Where We Are
    • New administration, experienced advisors
      • Democrats running the show
    • Problems have been identified, actions taken:
      • Housing: the no. of unsold new homes is falling; bad loans are working their way out of the system; already at low % level of GDP
      • Credit Crisis: solutions appear to be working; bank lending increasing 9%
      • Economic drags are easing: lower gas prices, lower inflation, dollar gaining value
      • Further fiscal stimulus: fed rate hike likely, below 1% by year-end; gov’t guarantees
  • 4. EVERYTHING isn’t broken
    • The scene at the shopping centers
      • Talk to the shopkeepers
    • The hiring scene
      • “ We’re just on hold.”
    • Anticipating leadership, direction, movement
    • And in the meantime, some investments are continuing to perform as designed…
  • 5. The Investment Landscape © 2008 Second Angel Bancorp. All Rights Reserved
  • 6. Investor Motivation: The IRA Fit “Never invest in a business you don’t understand.” Warren Buffett
    • For investors seeking:
    • Understandable investment
      • No leap of faith required; no gauging the market
    • In something familiar: Real Estate
      • Its value as COLLATERAL, NOT appreciation
    • Passive and w/o ownership and management issues
    • Stable, consistent, dependable, reliable, secured
    • An alternative to CDs and bonds
    • No correlation with stock market, no volatility
  • 7. Historical Investment Results
    • 9 percent to 12 percent returns (2x to 3x returns of CDs)
      • [10% avg across various economic cycles]
    • Compounding interest
      • [doubles every 6 1/2 years]
      • “ The most powerful force in the universe is compound interest.”
            • Albert Einstein
    • Monthly dividends
      • [ paid approx. $2,000/month per $200,000 account]
    • High reinvestment rate by investors
      • Reasons: Feel secure, like the returns
  • 8. This is Private Money
    • Loans based on and secured by the protective equity of real property
      • The focus is on the PROPERTY: equity and the borrower , not extraneous factors: Equity lending vs cash flow lending
    • Loan To Value (“LTV”) ratios/ “protective equity”
    • Exit Strategy: Property’s marketability & liquidation value
    • Two investment approaches
      • Fractional Trust Deeds/ Buying Notes
      • Mortgage Funds
    • See , “ Private Money Investing .”
      • [We wrote the entry…]
  • 9. Why Buy Notes?
    • Obtain the security of real estate without the hassles of managing and maintaining it
    • Enjoys the benefits of a secured revenue stream
    • No “taxes, tenants and toilets”
    • Investor in notes is placed above landlord in the financing stack
  • 10. Investing in Notes
    • The traditional approach
      • Still prevalent on East Coast
    • When property is sold without full payment, Buyer signs mortgage or deed of trust (“trust deed”)
      • Can be multiples ex: “1st trust deeds,” “2nd trust deeds”
    • Property is pledged to the lender of the money as security for payment
    • Note (“promissory note”) is the promise to pay
    • Ties the Borrower to the loan and its terms
    • Notes can be bought and sold
  • 11. Traditional Trust Deed Investments
    • The simplest - and most labor intensive - approach
    • Analogous to analyzing and buying a single stock
    • Investor finds a prospective borrower, assesses the risk, prepares documentation, and collects monthly payments
    • Investor makes all the decisions
    • Focuses all risk on a single loan on a single property
    • May diversify by making several loans on several properties
  • 12. Brokered Trust Deed Investment
    • Less Direct Contact:
    • Investor still makes all the decisions and has a single-source risk, but Broker finds the loan and prepares documentation
    • Investor makes decision based on Broker’s research and expertise
    • Investor collects monthly payments
    • Borrower pays Broker fees
  • 13. Fractional Trust Deed Investment
    • Larger Loans, More Players
    • A Brokered Trust Deed Investment, but with more than one Investor
    • Allows larger loan amounts, with each Investor receiving a pro rata share of monthly payments made on a single loan
    • Servicing Company collects and distributes the payments
    • Risk remains with the single-source property
    • Borrower pays Broker fees
  • 14. Fractional Considerations
    • Investor makes final decision…but at a price:
    • Size and complexity issues
      • Smaller loans, weaker borrowers
      • 2”-3” of loan documentation to review per loan
    • Investment $ not deployed 365 days/year
      • (minimum 1% return penalty)
    • No anonymity
    • No autonomy
    • Subject to capital calls
    • No compound interest
    • Liability issues
    • Licensing issues (CA)
    Biggest Issue: Diversification
  • 15. The Lending Process
    • There’s more to it than you’d think…
    • Multiple levels to consider during underwriting
    • Experience counts
    • Increasing complexity ex: documentation requirements
    • Servicing and collection issues never end
  • 16. The Alternative to Fractionals: Mortgage Funds
    • Resemble equity mutual funds
    • More prevalent on West Coast
    • Managed by licensed Private Lenders
      • “ Non-bank banks”
    • Investment secured by first (or second) deeds of trust
    • Deeds name the fund , not individual investors, as the actual holder
    • As interest is earned from monthly mortgage payments, the fund generates income
    • Income is compounded or paid out to investors monthly or quarterly
  • 17. Mortgage Fund
    • Qualified investors deposit funds in a mortgage fund managed by a Bancorp or other entity
    • Bancorp finds borrowers, assesses risk, prepares documentation, collects monthly payments and distributes payments to Investors.
    • Mortgage Fund provides investment dollars
  • 18. Mortgage Funds in the Big Picture
    • Consistent Returns
    • Low Volatility
    • Security of Underlying Assets
    • “ Never go to excess, but let moderation be your guide.”
    • Cicero (106 BC-43 BC)
  • 19. Source: Morningstar
  • 20. Sample Returns Annualized, by month Note consistency, low volatility
  • 21. Again: Consistency © 2008 Second Angel Bancorp. All Rights Reserved
  • 22. Mortgage Fund Loan Parameters
    • Ground Rules : Investors know what Fund is investing in. Offering Circular sets out lending criteria
      • Property types loaned on
      • LTV ratios for each type
      • Loan type
      • Location
      • Loan size
    • Generally fall within narrow range
    • BUT…varies by each fund’s loan risk parameters: first, second, mezzanine, etc.
  • 23. Diversified Portfolio: type, rates, terms
  • 24. Mortgage Fund Advantages: Investor
    • Instant diversified portfolio
    • Simplicity: little/no involvement with individual loans or borrowers
    • Higher Yield
    • Funds at work 365 days/year
    • Liquidity
    • Payment Options
      • Compound interest
      • Monthly Dividend payments
    • No capital calls
    • Anonymity/Liability
  • 25. Mortgage Fund Advantages: Borrower
    • More and better loan opportunities because of:
    • SPEED: From analysis through funding. Enables opportunities NOW
      • 1-2 weeks (sometimes days) vs 60 days for institutional lenders
    • Cheaper than a partner
    • More flexible, no bureaucracy
    • Minimal delegation of lending authority: deal directly with decision makers
    • Loans are “custom made” to work with the unique needs of each situation
    • Cost differential from institutional lenders not that substantial
  • 26.  
  • 27.  
  • 28.  
  • 29. Private Lending Niche Lending Specialties [examples]
    • Residential
      • First and Seconds
      • Rehabs
      • REOs
    • Commercial
      • Retail, Office, Warehouses, Churches, Gas Stations
    • Commercial Construction-Completion
    • Land Acquisition & Entitlement (not too popular…)
  • 30. The Commercial Property Advantage
    • Commercial Property Outlook
    • STABLE
    • Reasons:
      • Steady absorption cycle
      • Known supply (vs housing)
      • Limited supply going forward (land, entitlements)
    • Evidence:
      • Rising rental rates across different property categories
      • Slowly rising cap rates
      • Low default rate: .04% vs 28.00% for subprime residential
  • 31. Finding & Selecting a Fractional or Mortgage Fund Investment
    • Decide:
    • Fractional or Fund (or both)
    • Geographical area
    • Investment size
    • Property type: residential/commercial
    • Risk appetite: [note that yields fall within narrow range…]
    • Investor Eligibility/Amount to invest
      • Philosophy
      • Response to queries
    • Starting point:
      • The industry’s bible
  • 32. The IRA Fit © 2008 Second Angel Bancorp. All Rights Reserved
  • 33. Thanks
    • Questions:
    • Richard Zahm
    • (415) 730-1042
    • [email_address]