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    Private Mortgage Investment: Your Path to Creating Passive Income and Building Wealth
    Private Mortgage Investment: Your Path to Creating Passive Income and Building Wealth
    Private Mortgage Investment: Your Path to Creating Passive Income and Building Wealth
    Ebook179 pages3 hours

    Private Mortgage Investment: Your Path to Creating Passive Income and Building Wealth

    By Ralph Abbott

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    About this ebook

    Private Mortgage Investment

    Senior lending officer Ralph Abbott pens new book on achieving financial freedom.

    Thomas J. Stanley, Ph.D., wrote in his book Stop Acting RichAnd Start Living Like A Real Millionaire, Real safety is not in a diversified stock portfolio. One of the reasons that real millionaires are economically successful is that they think differently. Many a millionaire has told me that true diversity has much to do with controlling ones investments; no one can control the stock market. But you can for example, control your own business, private investments, and money to lend to private parties. It was this quote that inspired author and senior lending officer Ralph Abbott to help others worried about their 401k and retirement nest eggs, penning his new book Private Mortgage Investment.

    My reason for writing a book about private mortgage investing is not to promote another get-rich-quick scheme or investment fad, explains Abbott. Its about showing you an alternative investment concept one that is old and respected.

    In this straightforward and practical book, Ralph Abbott gets you quickly acquainted with simple strategies using mortgage investments to enhance your bottom line.

    Private Mortgage Investment cuts to the heart of successful mortgage investment, providing readers with a complete understanding of private mortgage investing fundamentals. It shows how to use direct investments, mortgage pool and investment clubs to get into the private mortgage investment business.

    As we move into the second decade of the 21st century, an increasing number of people just like you are discovering private mortgage investing. Its a basic, fundamental function of real estate finance that, with a focused effort and basic knowledge, has been demonstrated to be a safe and profitable industry for a growing number of investors who are either approaching or in retirement.

    And do you know what? If you have ever owned a bank CD, or have a savings account or checking account, you have already been investing but you have not received the benefits.
    LanguageEnglish
    PublisherAuthorHouse
    Release dateFeb 15, 2012
    ISBN9781468549577
    Private Mortgage Investment: Your Path to Creating Passive Income and Building Wealth
    Author

    Ralph Abbott

    Ralph Abbott is the president of Premiere Commercial Group, Inc. (PCG) and senior lending officer. Ralph has over fifteen years of commercial lending and commercial credit underwriting experience working in a national and community bank. As a vice president/commercial lending officer, Ralph has reviewed and underwritten over a thousand loan applications and has made several hundred loans in his career ranging from individual real estate investors borrowing $20,000 up to multi-million dollar commercial transactions. Ralph lives in Powell, Ohio with his family and enjoys reading, writing, learning, teaching, meeting new people and spending time with family and friends. You can reach Ralph at 614-339-4255 and he will be happy to answer any questions about private mortgage investing. Ralph Abbott Premiere Commercial Group, Inc. 3982 Powell Road Ste 234 Powell OH 43065 Web: www.premierecommercialgroup.com E-mail: rabbott@premierecommercialgroup.com

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      Book preview

      Private Mortgage Investment - Ralph Abbott

      Contents

      Preface

      Introduction

      Part 1

      Hard Money Loans

      Bridge Loans

      The Private Mortgage Market

      Private Mortgage Investment vs. Rental Property Investment

      Benefits of Private Mortgage Investing

      Why Borrowers Seek

      Private Mortgage Financing

      Players in the Private Mortgage Game

      Legal and Tax Structures Used for Investing

      Ways to Make Your Investment

      Part 2

      Private Mortgage Investing—Step by Step

      Locating and Analyzing Opportunities

      Property Valuation

      Writing the Loan:

      Due Diligence

      Risk Management

      Mortgage Management

      Types of Vesting

      Part 3

      Maximize Your Return: Working with Numbers

      Your Self-Directed Retirement Plan

      Conclusion: The Private Mortgage Opportunity

      About the Author

      Appendix: State of California Brochure

      Preface

      My reason for writing a book about private mortgage investing is not to promote another get-rich-quick scheme or investment fad. It’s about showing you an alternative investment concept—one that is old and respected. And do you know what? If you have owned a bank CD, or have a savings account or checking account, you have been already been investing—but you have not received the benefits.

      In this challenging economic environment, more and more hardworking people like you are worried about their 401k and retirement nest egg. This is a problem that I care deeply about, and recently I came across a great quote in a book I was reading. Here it is:

      Real safety is not in a diversified stock portfolio. One of the reasons that real millionaires are economically successful is that they think differently. Many a millionaire has told me that true diversity has much to do with controlling one’s investments; no one can control the stock market. But you can for example, control your own business, private investments, and money you lend to private parties. The quote is from Thomas J. Stanley, Ph.D., in his marvelous book Stop Acting Rich… And Start Living Like A Real Millionaire.

      No investment plan should leave an investor feeling out of control. I’ve discovered, and you can too, that private mortgage investments bring investor rights and control to a much higher level than other financial products that simply allow a buy and a sell.

      Private mortgage investments offer investors incomparable control over their investment, their money, and their risk. No other investment opportunity allows the investor the opportunity to negotiate the terms of the agreement.

      This book reveals how you can establish financial freedom through passive income, and get one step closer to the comfortable and rewarding retirement that you envision.

      Introduction

      Your dreams are what you are meant to be… You are what you settle for.

      Author unknown

      The first decade of the 21st century is often referred to as the lost decade in the American economy. If you had investments in stocks during that time, you know just how disappointing it was. A $10,000 investment in stocks made at the beginning of 2000 would have yielded about $9,090 at the end of 2009. For the first time ever, Standard & Poor’s 500 Index finished the decade with a negative total return, down an average 2.7% per year, as shown on the chart.

      image001.png

      Added to the loss of revenue was a heart-stopping volatility. Stocks sometimes soared but they just as often plunged to depths that did not seem possible in such a large economy.

      During the same time period, real estate prices plunged. People whose nest eggs were in their houses saw their values plummet, further dragging down their net worth.

      Bond investors fared better, making an annual return of 6.1% on ten-year treasury notes during the decade. But in a diversified portfolio this rate of return would not have been enough to turn the title.

      Think back to the performance of your investment portfolio during the lost decade. Did something like this happen to it?

      Complicating the question is something called asset correlation. This core concept in modern portfolio theory statistically measures the degree to which different asset classes move together. Investors usually put their money in a mix of traditional assets, such as stocks, bonds, and mutual funds, believing that they are assembling a diversified portfolio. But often, these assets move up or down together, so if the stock market falls, the entire portfolio tumbles right along with it.

      During stressful times, asset classes have high correlations. In addition, the increasing globalization of asset markets and the resulting interdependence of credit markers have led to a substantial increase in the ability of one sector to affect another. The financial stresses of the lost decade, for example, were felt across many regions and industries, increasing asset correlation.

      Low-correlation assets provide an optimal risk/return relationship, desirable in any portfolio, but they are particularly critical for retirement investors, who simply can’t afford to bet the whole farm on one financial investment or even a group of financial investments that move together. Retirees also need to guard against so-called black swan events, in which economic conditions are so extreme or sellers so panicked that everything falls all at once. Think about the events of 2008, when the housing bubble burst, bringing down the stock market and throwing bond markets into chaos.

      After such an experience, what is a prudent investor— somebody interested in maintaining a conservative, safe, truly diversified portfolio—to do?

      As we move into the second decade of the 21st century, an increasing number of people just like you are discovering private mortgage investing. It’s a basic, fundamental function of real estate finance that, with a focused effort and basic knowledge, has been demonstrated to be a safe and profitable industry for a growing number of investors who are either approaching or in retirement.

      Why private mortgage investing? Its time has come. It’s a response to what happened during the past decade, when our financial institutions attempted to make as many loans as they could, as quickly as they could. Words and phrases like non-recourse, 110% financing, stated income and no verification started to become commonplace. The resulting collapse changed the industry and opened a new market of short-term, hard money real estate loans.

      It’s called private mortgage investing.

      Private mortgage investing is similar to a bank writing a mortgage. The difference is that you are now the bank, and you receive the monthly interest income.

      Billions in private money real estate loans are made every year. These are high yielding investments that considerably outpace inflation. Returns are typically ten percent and more—and payments are made every month. Any investor, such as a retiree, who needs regular income will want to look at private mortgage lending as part of a diversified portfolio.

      These transactions are relatively safe. Of all the investments you can make, investing in mortgage loans is rated as one of the safest. This is evident when you compare interest rates on home mortgage loans with say, credit card rates. The mortgage interest rate is lower. That is because the loan is secured by the value of the real estate. If the borrower defaults, the lender can take and sell the property. There is no such asset in riskier unsecured credit card loans, which depend solely on the ability of the borrower to repay them.

      When the private mortgage investor makes a loan to buy a piece of real estate, that tangible asset—the property itself—secures the transaction. Also, the debt is recorded with the city or county government, so it is a matter of public record. The process differs from state to state, but in general, these debts are recorded locally either as mortgages or deeds of trust. For this reason, private mortgage investing is often referred to as trust deed investing.

      Trust deed investing is an old and respected concept. Since the 19th century, banks have been accepting trust deeds as security for real estate loans. In the first part of this century trust deed investing earned a bad rap because US financial institutions—traditionally the country’s most stable and dependable trust deed investors—got carried away with real estate loans. They became greedy and made as many loans as they could to borrowers who were often unqualified. The result was the real estate bubble. The bursting of that bubble led to the recession that began in 2007.

      The landscape is different today. Perhaps you have heard how difficult it can be to get mortgage loans in the wake of the real estate boom? Banks and other lending institutions were too quick to make loans during the bubble, and now, they have become cautious. They keep tight fingers on their purse strings so mortgage money is not only harder to get; there is less of it available.

      This creates a big opportunity for private mortgage investors.

      The purpose of this book is to let you know there is an alternative investment strategy that can net you a good return, including a monthly income; give you the assurance of safety; and truly diversify your portfolio. In the following pages, you will learn about private mortgage investing. The book begins with an overview of the industry and some basic definitions. Then it shows you step by step how to develop and make private mortgage loans. Once you’ve gotten your feet wet, you’ll learn the finer points and how to effectively manage your growing nest egg.

      Private mortgage investing—using private money to make mortgage loans—is an old and respected practice. Is it foolproof? No. Like any investment, mortgage loans can lose value. No one can guarantee any investor a profit. But in these volatile times when traditional assets are not dependable and are increasingly correlated, private mortgage investing has a new significance. See how it can play a key role in your truly diversified portfolio.

      Part 1

      Learning About Private Mortgage Investing

      Hard Money Loans

      You don’t have to be rich to invest, but you have to invest to be rich.

      —Bradley J. Sugars

      Before we begin to discuss private mortgage investing, let’s take a look at the specific financial products that private mortgage investors offer to customers.

      The growth in private mortgage investing is primarily focused on a class of mortgage loans that in the United States and Canada are called hard money loans. This is a specific type of asset-based financing in which a property owner obtains short-term loan funds based on the value of the real estate. Hard money loans are typically issued at higher interest rates than conventional mortgages and are almost never originated by a commercial bank or other deposit institution.

      Hard money loans are similar to bridge loans and usually demonstrate similar underwriting criteria and cost of funds characteristics. However, while a bridge loan refers to a real estate property or investment property that may be in transition and not yet qualified for traditional financing, a hard money loan most often refers to not only a loan with a higher interest rate secured by a commercial mortgage, but also to a borrower with a distressed financial situation, such as arrears on the existing mortgage, commencement of foreclosure proceedings and/or a borrower who has filed (or been forced to file) bankruptcy.

      Two things are important when understanding hard money loans.

      1. The credit characteristics of the borrower are not as important for a hard money loan, since the loan amount is based on the market value of the real estate used as collateral.

      2. Typically, the maximum loan to value ratio for a hard money loan is 65-70%. This low LTV provides additional security for the hard money lender, in case the borrower does not repay and the lender has to foreclose under their mortgage on the property.

      In contrast, soft money loans are like your conventional home mortgage. They take longer to process; the loan periods are longer (fifteen, twenty, or thirty years); and the rates are lower. In a conventional soft money loan, the borrower’s income and credit rating are just as important as the value of the property.

      The Structure of the Hard Money Loan

      A hard money loan is a type of mortgage loan collateralized against the quick sale value of the real estate property for which the loan is made. Hard money loans developed primarily in the commercial real estate industry as an alternative last resort for property owners seeking capital against the value of their commercial real property holdings. The hard money industry began in the late 1950s when the credit industry in the United States underwent drastic changes. The hard money

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