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Tuesday, July 18, 2006

The Next Venture Has Begun

As I alluded to earlier, I have started a new venture that is pretty exciting. Things have been finalized now and I am willing to discuss some details.

Several months ago, I attended a get-together of several people from the richdad.com message boards. I came out of that meeting very fired up on apartment investing and got started on educating myself on that subject. I haven't gotten very far in that respect, but I have put another one of the important points from that meeting into play - partnering.

Les, one of the presenters and participants at the meeting, is someone whom I have had some limited contact with over the past 4 years. He has recommended a couple of investments to me that have done pretty well, he has a great reputation, and after spending a weekend talking and listening to him, my comfort level with him is fairly high. So when it became apparent that I wasn't going to be ready for apartment buying in the near future, I decided to look at other investment opportunities. I contacted Les to see what he had available. Most of the projects he had were medium- to long-term investments that were expected to generate large capital gains, but no cashflow. Since I am looking for cashflow right now, I eliminated these. There were two that did provide cashflow and, after reviewing them, I decided on one.

My investment is part of a $1.75 million dollar first mortgage on a commercial renovation project going on in northern Louisiana using hard money loans. The project consists of two office buildings, a parking garage, and a parking lot. The project has been going on for 6 months so far, with an estimated 6 to 18 months remaining. At this time, the principals will refinance to a conventional loan and pay off the hard money loans. One office building has a 30% occupancy rate, the other 5%. However, the building with the 5% occupancy rate already has a positive cashflow, so there is huge room for profit there. The people doing the rehab feel the other building can be brought up to market occupancy and rates in a short amount of time. (One reason the occupancy is so low is the previous owner was planning to convert the top two floors to condos, so they weren't even attempted to be rented out.) The renovations they are planning will improve the existing office space, allowing higher rents to be charged - going from around $5 per square foot to $8 - $10 per square foot.

My investment is actually a separate contract between Les and myself. He had a large amount of his own money invested and I am buying out most, but not all, of his position. My investment is for $150,000 at 12%, with interest only payments for 6 to 18 months, after which the principal amount is due. There is no prepayment penalty. The project has a history of on-time payments. The contracts were faxed on Friday, the money was wired, and I am now a hard money lender on some commercial property! This is my first investment with the "big boys" and so far, I am impressed. Les is the total professional and doesn't keep you hanging - less than 1 week elapsed from the time I decided to invest until the process was complete.

Several things excite me about this investment. First, it a large amount of my money. The houses I have written about to date are investments for a group of investors (except for the very first one, which was also solely my investment) who have basically hired me for a percentage of the profits. I am using their money. This investment is all mine. Second, it commercial property. And lastly, it out-of-state. Although I have a couple investments in companies in the San Francisco area, they are relatively small, so I consider this my first real out-of-state investment in real estate.

14 comments:

Anonymous said...

Are the terms just a straight 150K interest with a 12% return? Most hard money lenders charge points upfront as well as the interest rate. I am concerned that your return is not high enough given the risks that I perceive. Correct me if any of these are incorrect:
* you are new to hard $ lending (at least as a lender. $150K seems like a lot of money to throw at an enterprise that you are new to)
* the payments are interest only
* your investment at this return has a limited lifespan (6 - 18 months) at which point you need to shop for the next investment
* there is an balloon payment rather than full amortization
* this is a renovation project [and rehabs/renovations can go wrong!]

That said, if you are very comfortable with your equity cushion and with the competency of the renovators this may be a good deal.

Some more questions:
* Are you making this investment from a Roth IRA?
* Are you using any leverage by borrowing your funds from somewhere else?

Shaun said...

>Are the terms just a straight 150K interest with a 12% return? Most hard money lenders charge points upfront as well as the interest rate. I am concerned that your return is not high enough

There were points, but Les and the other hard money investors got those when the loan was originated. As I stated, I am buying part of another investor's original position.

>* you are new to hard $ lending (at least as a lender. $150K seems like a lot of money to throw at a enterprise that you are new to)

I'm not totally new to it. The fact that I am willing to put so much in this is a reflection of my respect and trust of the person I am investing with.

>* the payments are interest only

Correct. Almost every hard money loan I have ever seen (as a lender or a borrower) has interest only payments.

>* your investment at this return has a limited lifespan (6 - 18 months) at which point you need to shop for the next investment

Yes. This is by design. As I stated, I am not looking for a long term investment right now.

>* there is an balloon payment rather than full amortization

Yes. See above regarding interest only.

>* this is a renovation project [and rehabs/renovations can go wrong!]

Things can go wrong with new sales too. Things can go wrong with any project.

>* Are you making this investment from a Roth IRA?

No. That would be a good idea, but I am not set up with a self-directed IRA yet.

> Are you using any leverage by borrowing your funds from somewhere else?

Yes.

monarchcrest said...

Hey Shaun... Glad you went forward with that. Just curious, did you have a lawyer review the documents?

Steve said...

Good job, Shaun. I've read some of Les' posts on richdad.com, but haven't talked with him personally. To be honest, I haven't even been on that site in months. I'm glad you decided to further extend you comfort zone and try out some new ventures. I certainly hope things work out well for this project.

You mentioned your stake is a $150k IO loan @12%, and then you mention vacancy rates and cashflow. Is your money strictly with the loan, or is it tied to cashflow profits from leases as well? I'm thinking the former and you were just giving insight into how secure your investment is with the vacancy/cashflow forecast.

The one concern I would mention is putting all your eggs in one basket. I don't think you are doing this, but, if so, I certainly hope the deal blossoms without a hitch. I'd hate to hear the deal went south and you lost ALL your reserves.

Again, great job!! I can't wait to hear about the next commercial undertaking. :-)

Shaun said...

KDog - No, I did not have a lawyer review the contract. It's a simple one page contract (well, one page per building, but they are the same except for the building addresses) written in plain english. There is nothing I don't understand or have a question about. (You'll recall Les is a fan of the KISS principle.) Again, it comes down to a trust issue. Everything was very clearly spelled out. I also received copies of the original mortgage and disclaimers of Les' involvement with the other parties involved. In fact, I found out the original mortgage is at 14% interest, so I'm getting 12% and the escrow servicing company (owned by Les) gets 2% for handling my payments. It's a win-win for everyone.

Steve - Yes, the cashflow and vacancy data was to give some insight into the investment risk level. All my eggs are not in this basket. Many, but not all :-)

prlinkbiz said...

Stu that is fabulous!! I'm so excited to see all that has transpired as a result of the get together!
We'll have a coffee meeting maybe next week so we can hear all about it!

monarchcrest said...

Shaun, I agree that it's a trust issue. My friends and I had lawyers review the docs and since they didn't know Les and the lawyers had some problems with the docs they didn't pull the trigger.

Anonymous said...

Hey Shaun, how is your Prosper.Com thing going?

Anonymous said...

If the investment was solid, Les would not have tried to find someone like yourself to get him out of his position.

Anonymous said...

"If the investment was solid, Les would not have tried to find someone like yourself to get him out of his position."

Well, that's clearly not true. The originator collected his points, will now be sucking out 2% of the interest, and has moved his money on to other things. That doesn't make the 12% Shaun is getting any less solid.

Shaun said...

Prosper.com is so-so. Three loans are performing, one is over a month late. I have a feeling it will be going to collections.

Les still has a significant position in the project, even after my investment. Plus, as the last commenter noted, he is still getting 2% on my money. I don't know all of his financial plans, but he did tell me he already has several thousand a month in cashflow and he is now looking for capital gains deals. He is probably taking the money from me and investing it in one of those deals.

The bottom line is there are those people who would do this deal and those who wouldn't. And you really can't make a 100% accurate judgement based on what I have posted because I have not posted every single detail. (Nor will I. This deal is a private deal and the prospectus clearly states the information in it is not to be disseminated.) It all comes down to your way of thinking. Do you see opportunities or problems? Are you looking for ways for the deal to succeed or for it to fail? There will always be people who don't agree with me, my reasons, or my methods. There will always be people who want to see others fail, for whatever reason. In other words, there will always be "noise." If you want to be a successful investor, you need to learn how to ignore the noise and trust your own judgement.

Anesia said...

Congratulations Shaun! Amen to there always being noise, just like crabs in a bucket. Everyone has their own criteria for investing, and our criteria constantly changes given our goals and what might be happening with other investments at the time. What's a great deal to one might be marginal to another, and too risky for yet another... at that point in time. Diversity of opportunity - this is what makes America great!

Congrats again on taking action. Looks like you have a lot of support here. Enjoy your new passive income stream :)

Steve said...

There will always be people who don't agree with me, my reasons, or my methods. There will always be people who want to see others fail, for whatever reason.

Well said on both accounts. Only YOU know what is best for you and your goals - nobody else. Keep up the great work!

Seattle Eric said...

Shaun - I'm impressed. You're taking a stab (ok, a big stab) at the next level of the monopoly game. I think we all inspire to have the guts to make such a leap.

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