Middle Class Millionaires

When times are uncertain, even if the problems that caused the uncertainty were not your fault, they still affect you negatively. Such is the case with the residential mortgage market and its negative effect on the commercial lending business. It’s too bad that the stupidity and arrogance of the residential single family detached market has become a problem for those involved in investment real estate. I guess that the majority of us just shake our heads in disbelief at the way some of our lenders are now treating us. It makes you want to tell them face to face, “Hey, don’t punish me because some moron loaned 125% of the value of a house to someone who’s credit history made them a questionable risk. Don’t blame me for the significantly over valued appraisals, the ridiculous promises, or the cable TV shows depicting flipping homes as a low-risk easy way to wealth. Don’t blame me for artificially driving the prices of homes up or the extension of credit to already strapped buyers. I DIDN’T DO ANY OF THAT STUFF SO WHY MAKE IT SO HARD FOR ME TO GET A MORTGAGE THAT WORKS FOR AN INVESTMENT TRANSACTION TODAY?”

Lenders will give you a pat answer like: “It’s just a matter of reducing risk.” I’ve got news, the risk they need to reduce is the single family market risk, not commercial or investment risk. After all, it was decisions on single family homes that got them in trouble, not intelligent revenue-based lending on commercial or investment deals. It’s kind of like punishing the big brother because the little brother misbehaved. We can complain all we want and point out the facts until we are blue in the face and it won’t change anything. So how do we keep financing deals that ought to be done? Well, … we finance them threw alternative lenders. Lenders who want to get a secure strong 7%, 8%, or 9& plus maybe a kick at some time in the future. Where are these lenders? We make them. They are made of people who live in your house, your neighbor’s home and in the home down the block. They work in your office, manage the local taco restaurant and drive truck cross country. They are everywhere. They don’t have the money to finance a whole deal themselves, but together they certainly do. They just need to be brought together correctly to generate a great return and enjoy the growth of their investment.

“That’s easier said than done,” you say. Of course it is. That’s what everybody says about stuff that requires work. But it is doable more easily than you might imagine. It just requires time and effort on your part. Here’s the simple look.

Form an LLC (or a corporation) for the purpose of investing in or lending on real estate. You can call it a Real Estate Investment Trust (REIT) if you like and are willing to meet the distribution requirement of that classification. Once the LLC (or corporation) is formed, start looking for good deals and investors simultaneously. Investors can invest their own available capital, or they can use their self directed IRA or 401K balances to make the investment. While waiting for the amount to add up to enough, it is invested in say, money market funds, so your investors are already earning what the market is paying. When the balance is enough and a deal qualifies, become the bank!

Under this scenario you can take investments of virtually any amount, depending on your structure and specifically on your qualification for registration exemption based on Regulation D, Section 230: 504, 505, or 506. It is being done everyday around the country and you can do it too. You can moan about the plight of the market and cry foul because of mortgage abuses but that will do you no good. Never has, never will. Your other option is to learn how to make the market your servant instead of your master, and then make it happen. It is up to you. Learn what you need to know and then get it done. The only thing you lack may be a little knowledge, experience and the willingness to put forth the work.

Another option of course is just to syndicate the deal in the first place, but that is a topic for another time. Good luck. Here’s wishing you success. If we can help we’d be glad to.