Day 2
Yesterday I posted my first in a series of 50 days of blogging to raise $500k. My events of yesterday were just that, very eventful.
I started off my Friday just like I would any other Friday. With a cup of green tea! I then went to my office and started to make magic happen. The great thing about investing in mortgages is that I am able to use my creativity 100% of the time. In the morning I reviewed the offers that I had put in the day before and I went over the notes from the real estate meeting that I went to from the night before. I had the great opportunity to listen to the great Pete Fortunato in Sarasota. I did feel a bit out of place (like every REIA I go to) because everyone but me in the room goes after the physical real estate. Don’t get me wrong, I have my own portfolio of physical real estate. I just hate the toilets, tenants, and trash that the physical real estate creates. I digress, back to pete. I really appreciate the creativity that pete uses in his real estate dealings. Now pete invests in SFR mostly and then rents them out. The thing that he uses is the creative financing that I use every day. Some of the deals that he explained he did made me feel very happy to know that I also know and use those strategies. The rest of the room however had no clue what he was talking about. I think that is because the real estate gurus out there today only focus on the physical side. They never talk about the paper side. But think about it. No matter where you drive in this country what do you see? Buildings IE a note and security instrument. But who is the only person that understands how the paper that makes those buildings happen are the top end bankers. I don’t know about you but I would rather know the entire real estate business, rather than just half. Plus there is more money that is in paper than the physical. Now I spoke with pete and he holds some paper but like I said mostly SFR rentals. The one thing that he said he didn’t like about holding the paper is that it is like an annuity, it is always going to zero. He is correct, but he failed to discuss one very important principal. If you buy a mortgage every year, you are buying that $$ amount at the houses appreciated price. So if you do this regularly you offset any appreciation that you miss from owning the physical. Now the question was posed to me that if you only own the note, you don’t get any appreciation. That is correct but my question back to that person was this. How do you spend your equity? The person said that well, well I can’t. I said exactly, you can only spend your cash flow (ie note, rent) and that for him to capture his equity he needs to turn that into a loan against the property or sell it off or rent it. Let me address how you really make money with a mortgage
1. Get a loan against the property. I don’t know if many people really understand how a mortgage is written. This is the dirty little secret. Did you know that bankers don’t care if interest rates are at 1 or 2 or 8%?? Did you know that bankers make more money if the lending rate is 4 and they borrower from the fed at .01. The spread is smaller than if the lending rate was 7 and borrowing was 5%. I think that is very obvious BUT on a 30 year mortgage at 3% for $100,000 do you know actually how much profit the lender generates???? Its not 3% here is why. The way a mortgage works is a 30 year loan or better yet 360 months is actually 360 individual loans. So if you start out at $100000 that monthly payment is $421.60 and after you make that payment the next balance owed is $99828.40. You are now saying, Scott I’m not 2 years old, I get that. Yes Yes but did you know how the formula to calculate amortization works??? You take that 100k and to find out your monthly payment you don’t multiply it by 3% you multiply it by 1/12 of 3% because that 3% is an APR so the 3% is spread over 12 months. So that would be $100000k x .0025% that is $250.00 but that is what goes to interest. The principal is $171.60. Now when you add up each months interest over the course of the loan that amount is $51,777.45. If you divide the 151,777.00 that the lender got back by $100,000.00 that he lent you will see that that is a 51% profit. Well if you calculate that to figure out what that yearly interest rate is it now magically becomes 5%. Now for that low borrowing rate of 3% it will be a super safe investment with a 750++ credit borrower. Not bad for a safe guaranteed investment without any of the headaches of ownership.
Now just think if you purchased that mortgage at 50% of its value because it was defaulted and then got them paying again. Think of that return!!
I have gotten way off track and will end it there today. I’ll update the deal that I closed today on tomorrows post.
Respectfully,
Scott Schmitz
