Lately,
probably because of the RRSP season that is upon us, we've seen firms
advertise high interest rates again .. using such terms as "guaranteed",
"mortgage backed", "secured by real estate" or "preferred rate of
return" or similar misleading words.
We
do understand the desire for monthly income, especially by older folks
or retirees ! The financial industry is full of clever
marketing people with little or no real world investing experience ..
catering especially to the uneducated and the retired income seekers.
An
annual return in excessive of perhaps 5 or 6% has RISKS ATTACHED. Most
normal businesses in the western world canNOT sustain, over a long period of
time, 6%+ fixed distributions without exposing you to undue risk !
Many
real estate firms or other investment syndicators have gone bankrupt or into foreclosure during the recession of 2008/2009. Just because the
recession is over doesn't mean a 12% annual return, paid monthly, is
very doable. It is only achievable under some very select scenarios - but with
very high risk.
One
such risky investment class is construction, especially in commercial
construction, resort locations, rural areas or in tropical locations.
Another one is land development. A third is second mortgages on unusual or poorly performing assets. If you are the lender and the project
does not sell as planned your capital is at risk especially if your
"mortgage backed" or "real estate secured" loan is in 2nd position
behind an expensive construction mortgage in 1st position- or on a hard to sell or semi-finished project. This lender
is in priority to you and may take the asset away, through a foreclosure
process, and you lose all your principal.
Therefore, understand the nature of the business, the experience &
proven track record of the operator and the position your investment is
in - don't look only at the glossy marketing material. Promises and
fancy charts and brochures are easily created, but delivering results in
the real world is very hard!
11pt; font-family: "arial","sans-serif";">
Also,
have a look at their existing balance sheet. If you see other mortgages
with interest rates that are higher than perhaps 5 or 6%, BEWARE.
Commercial mortgage terms today are around 5-6% .. lower for apartment
buildings or residential houses/condos, around 4%. Therefore, if you invest with someone that has 8%
or 10%+ mortgages on their balance sheet, ask WHY IS THAT .. and the
answer should be (but usually is not): "because our business is very
risky and no commercial lender would give us reasonable terms !!
Therefore we are looking for suckers such as you to be fooled by a 12%
interest rate, paid monthly". Best to walk away from such an investment !
Keep in mind that in a 3 year construction project, the "interest" paid to you on a monthly basis is just a return of capital, from your own money
.. or from new investments. A modified Ponzi scheme really ! The income
in these projects comes from selling land parcels or condos .. years
down the road.
Therefore,
always, always consider return OF capital before you consider return ON
your capital when evaluating any investment option !
Consider
that you have a capped upside, but can still lose all of your invested
principal if the project is not selling as fast as planned or for the
prices targeted.
Consider the risk adjusted return,
please .. not just the promised return. A bit like gambling in Las
Vegas, you can double your money in a few minutes placing it on "red" on
the roulette table, but on average, you'll lose. The risk adjusted
return is negative, despite the ad "double your money with us" !
If
you invest in a JV [with a REIN member] or a real estate equity syndication firm you are the owner of the
underlying real estate, benefiting from all the equity and gains being
created through mortgage paydown and value upside.
probably because of the RRSP season that is upon us, we've seen firms
advertise high interest rates again .. using such terms as "guaranteed",
"mortgage backed", "secured by real estate" or "preferred rate of
return" or similar misleading words.
We
do understand the desire for monthly income, especially by older folks
or retirees ! The financial industry is full of clever
marketing people with little or no real world investing experience ..
catering especially to the uneducated and the retired income seekers.
An
annual return in excessive of perhaps 5 or 6% has RISKS ATTACHED. Most
normal businesses in the western world canNOT sustain, over a long period of
time, 6%+ fixed distributions without exposing you to undue risk !
Many
real estate firms or other investment syndicators have gone bankrupt or into foreclosure during the recession of 2008/2009. Just because the
recession is over doesn't mean a 12% annual return, paid monthly, is
very doable. It is only achievable under some very select scenarios - but with
very high risk.
One
such risky investment class is construction, especially in commercial
construction, resort locations, rural areas or in tropical locations.
Another one is land development. A third is second mortgages on unusual or poorly performing assets. If you are the lender and the project
does not sell as planned your capital is at risk especially if your
"mortgage backed" or "real estate secured" loan is in 2nd position
behind an expensive construction mortgage in 1st position- or on a hard to sell or semi-finished project. This lender
is in priority to you and may take the asset away, through a foreclosure
process, and you lose all your principal.
Therefore, understand the nature of the business, the experience &
proven track record of the operator and the position your investment is
in - don't look only at the glossy marketing material. Promises and
fancy charts and brochures are easily created, but delivering results in
the real world is very hard!
11pt; font-family: "arial","sans-serif";">
Also,
have a look at their existing balance sheet. If you see other mortgages
with interest rates that are higher than perhaps 5 or 6%, BEWARE.
Commercial mortgage terms today are around 5-6% .. lower for apartment
buildings or residential houses/condos, around 4%. Therefore, if you invest with someone that has 8%
or 10%+ mortgages on their balance sheet, ask WHY IS THAT .. and the
answer should be (but usually is not): "because our business is very
risky and no commercial lender would give us reasonable terms !!
Therefore we are looking for suckers such as you to be fooled by a 12%
interest rate, paid monthly". Best to walk away from such an investment !
Keep in mind that in a 3 year construction project, the "interest" paid to you on a monthly basis is just a return of capital, from your own money
.. or from new investments. A modified Ponzi scheme really ! The income
in these projects comes from selling land parcels or condos .. years
down the road.
Therefore,
always, always consider return OF capital before you consider return ON
your capital when evaluating any investment option !
Consider
that you have a capped upside, but can still lose all of your invested
principal if the project is not selling as fast as planned or for the
prices targeted.
Consider the risk adjusted return,
please .. not just the promised return. A bit like gambling in Las
Vegas, you can double your money in a few minutes placing it on "red" on
the roulette table, but on average, you'll lose. The risk adjusted
return is negative, despite the ad "double your money with us" !
If
you invest in a JV [with a REIN member] or a real estate equity syndication firm you are the owner of the
underlying real estate, benefiting from all the equity and gains being
created through mortgage paydown and value upside.