Certificates of Deposit
A 5 year $100,000 Certificate of Deposit (CD) at 1.5% pays out $107,728.40 at the end of 5 years to the depositor. The bank takes the $100,000 and makes a potential 10% average return and after five years receives $161,051.00 and at the end profits $53,322.60 plus receiving a monthly cash flow ($908.70) in a 25 year amortized mortgage payments from a residential or commercial real estate venture. The bank will usually sell the note in 60 months receiving a premium or balloon payment which sends their profits through the roof.
Meanwhile the depositor receives into their accounts not their pockets $7,728.40 divided by 60 months) a pitiful $128.81 monthly for 5 years or $29.96 a week (weak) or (choke) $4.28 a day and all the while have no access or monthly income from the $100,000 (CD), and on top of that you are liable for taxes and also if you need to withdraw your money before the 5 year period. Well you know (the banker penalty fee and tax treatment).
An annuity is an investment that is meant to produce a lifetime income at a certain date and time. By depositing a lump sum or payment contributions this product is designed to return a growth rate between 3% (guaranteed) to 10% (non-guaranteed) depending on the growth rate for any given year. This product is strictly a retirement instrument and is not intended to be used as an aggressive investment growth product. On the other hand if you feel more comfortable with this product then by all means you such seek out as much information about this investment product. Lump sum single pay, periodic pay and indexed products are just a few definitions of the advantages and differences in the annuity investment. Matrix Equity has a wealth of information on annuity investing.
When it comes to real estate investment there are many variables to consider. The number one decision is which product to pursue as an investment whether it’s single family residential, multi-family residential or the more aggressive commercial real estate covering retail, office, industrial properties, senior living, hotels, storage, mobile homes or other ventures such as land. Another consideration is to decide whether to invest in the physical real estate or the financing (notes). For investment purposes only we will concentrate on the notes and not on the physical real estate at this time. For more information on the physical aspects of residential or commercial real estate visit Matrix Equity.
Real estate notes involving physical real estate can be a great source of not only having control of the physical real estate without the responsibility of maintenance and repairs but also receiving a monthly cash flow and profiting on the sale of the note.
When the seller of any property decides to do owner financing on their property they are in effect becoming the banker in the deal. There is no law against the seller doing their own financing of their own property but the structure of the note must absolutely be a salable and profitable note. Why? Because unbeknownst to many property owners is the fact that just like the banks the property owner who does owner financing can actually sell that note at some time in the future for cash. The note will be discounted (purchased at a lower price than the originated price) and could sell for 3% to 10% of the balance depending on the quality of the note. If the note was structured properly in the beginning it will draw a higher offer price than a poorly structured note that can sell at a lower price if it will sell at all and can usually be sold for cash after three months (seasoning) of on time payments receives from the buyer of the property. For this reason a note appraiser and note creator is a valuable service to utilize before selling or creating a real estate note. The services of Matrix Equity has the tools necessary to help create or appraise a real estate note.
Taking the example from the Certificate of Deposit (CD) above let’s analyze the difference between $100,000.00 invested in a CD vs. the same $100,000.00 invested in a real estate note.
We will assume that a seller has already carried back a profitable note that was created with $100,000.00 with 10% interest and 30 year term with a 20% down payment leaving a balance of an $80,000.00 note resulting in a monthly payment of $702.06 with the buyer paying the taxes and property insurance. After three months seasoning the balance of the note is $79,555.25. The seller at this time can decide whether to sell the note at a discount for immediate cash or keep the note for a monthly retirement income without the headaches of property maintenance and repairs. If the seller decides to sell the note they will have to do research for buyers of notes and without any knowledge of how the process works they can be exposed to low ball offers from non-professionals who saw a late night infomercial and seeks to get rich quick on the unsuspecting seller. The first red flag is if they are not dealing with a title company then it is best to run away from the offer. The title company offers financial and property protection for all parties involved. Without the use of a title company you are putting your entire project at risk. Risk will always be a part of investing but protection is better for a good night's sleep. Quiet enjoyment.
Once you find a reputable investor or note buyer they may or may not make an offer on the note. This will depend on the quality of the note. But say you have quality note and the investor offered 3% for your note then the offer price will be somewhere around $65,000 to $68,000 cash now. But if the note has a few correctable issues then the offer from the investor can be as high as 10% discount leaving an amount of $45,000.00 to $50,000.00 cash now instead of waiting for future monthly income from the current note. This concept of discounting is called the Time Value of Money (TVM) which states that a dollar today will not have the same value in the future. The price of gasoline is a good example of the TMV.
The investor will usually calculate for a holding period of five years and then sell the note to move to other ventures. Your mortgage company or bank does the same thing as at some time you will be asked to make your future mortgage payments to another financial institution. This is because the note or (paper) was sold. If the note has no marketable value then it is considered a junk note and will not get an offer because it will be difficult if not impossible to resell at a future date. It is best to have your note appraised or professionally structured from the beginning before attempting to do owner financing or selling a current note you already have in your portfolio. Just because your note is in junk status does not mean it can’t be restructured and made marketable and profitable.
Don’t be offended by the offer price because it’s the nature of the banking and financial industry. Large insurance companies and pension funds invest in notes but on a grander scale.
If you decide to invest in this type of product you can see that with the note example above you will receive instant equity plus an monthly cash flow and if you sell the note you will receive a lump sum payment which is leap years ahead of the Certificate of Deposit (CD). The argument against CD's is there is no monthly income to be received, no access to your funds without penalty and also a tax liability. With note investing you are receiving instant equity (as an investor), monthly cash flow, tons of tax write off advantages and a lump sum payoff if you decide to sell the note. Something to think about.
For more information visit http://www.matrixequity.com/MortgageNotes.htm.