|Replacing Active Real Estate Income with Passive Real
Estate Income Through High-Interest Trust Deeds
Your tired of hassling with tenants, contractors, leasing agents, brokers and attorneys.
You have owned income producing property for the last 20 - 30 years, and you’re ready to leave behind
the day to day problems and enjoy life. The kids are on their own and you want to travel at will and
spend winters in a warmer climate or summers in a cooler one. You only have one problem; if you sell
your real estate holdings and invest the proceeds in CDs, your income will be cut by 80% or more.
The stock market looks too high and too risky.
"If only I could replace my monthly income without depleting my nest egg," you
think, "and without losing sleep over the stock market."
Well, there is a way to make this happen: by investing in trust deeds, or private mortgages
loans. Simply put, trust deeds are short-term loans to real estate investors secured by the value of
the real property as collateral. Investors who invest in trust deeds typically make a 12 to 18 per
cent return, paid out monthly, with a minimum investment of just $50,000 and relatively low risk. As
a result, they are able to enhance their lifestyle significantly without threat to their principal, or
built a large nest egg, safely, in a relatively short period of time.
Case in Point
I'll give you an example: my wife's parents. My father-in-law has had a couple of
concerns. First, he's significantly older than his wife--he is 77, she is 65. Second, women have a
longer life expectancy than men. Statistically, my mother-in-law will live 13 to 15 years beyond my
father-in-law. My father-in-law has an old-fashioned Sears pension which cuts in half when he dies,
and Social Security, which also cuts down by about one-third when he dies. These diminished resources
would fail to provide adequately for my mother-in-law.
The two of them decided that they needed more income, or some way to increase their capital
base. At the time, they owned an apartment complex in Alvin, Texas, which was a good investment, but
wasn't producing any income after the expense of vacancies, repairs, management, and so forth. So
they sold the apartment complex and invested the proceeds in three different mortgage liens through my
company. From the $200,000 they invested, we created a monthly income of about $3000. We did a
projection showing that over 13 years, we'll be able to replace every lost dollar of pension income
and social security income, should he pass on first, double the principal in real terms.
In addition, my in-laws can now live higher than they did. In fact, they just decided to
take a $10,000 trip to Europe, rather then the usual $2,000 cruise out of Galveston. They're glad
they didn't opt for Plan B, an annuity, with a return of only 8 per cent and the guarantee that when
you die, you'll lose your total investment. Now my in-laws have a 14 to 18 per cent return, plus their
How Trust Deeds Work
Private mortgage loans are never greater than 65 per cent of the appraised value, secured
by income producing property only (apartments, homes, office buildings, warehouses), and only made on
investor property. A lot of notes on the market are connected to primary residences. With Texas
homesteads, for example, there are many different laws involved, many of which benefit the borrower.
Most mortgage companies originating private mortgages lend only to professional real estate investors,
not owner-occupants of residential properties, thereby by-passing the problems with homesteads. The
companies make a profit by charging borrowers origination fees for the loans, while the investors
collect all the interest.
We personally examine and select properties carefully to make certain that they truly are
worth the appraised value. We look at the property as much or more than we look at the borrower,
knowing that the property will always be there. Property doesn't get divorced, property doesn't
declare bankruptcy, property doesn't have financial problems. Property is the basis of wealth in the
United States, in nine out of ten families.
Should we have to foreclose, we can sell the property at 10 or 15 per cent off and still
make a profit. We can put it on the market at 25 per cent off and still make a profit. But defaults
are rare. Our portfolio for the last 20 years shows a 4 per cent default rate. When a default occurs,
the mortgage company picks up the slack. They’ll handle the foreclosure, any property rehabilitation
necessary, and the property sale.
Many of my clients start with a small portion of their portfolio to see how it works. Once
they put in an initial $50,000, and it works real well, they're eager to invest a greater amount of
money because their comfort level rises. They receive the monthly income checks, become familiar with
the process, all the safeguards that we use, and then they call me up and say, "Do you have
anything else available?" Over the course of time, they increase their investment to a point
where their comfort level meets their income need.
The risks are fairly limited if solid procedures are followed. All mortgage documentation
will be standardized by the mortgage company originating the loan, so the investor will know that the
mortgage note and deed of trust are drawn up to his benefit.
The risk is going to be somewhat higher than government insured money market funds, or
government bonds. But it will be substantially lower than stocks, gold, silver, or any assets that
you hope will increase in price--assets that could go up or down in value.
An Individual Decision
Deciding how much of your portfolio might ultimately go into mortgage liens is an
individual decision. I personally have 75 to 80 per cent in mortgage liens, which represents the
proceeds from the sale of my automotive business. Before I became actively involved in the private
mortgage business, I was an investor, looking for a way to replace the income from the business with
a less time-intensive instrument. I spent two years researching the possibilities. My father-in-law
has 50 to 60 per cent of his portfolio invested in mortgage liens through our company. It depends on
the size of your portfolio, what you're trying to accomplish.
I can't recommend mortgage liens highly enough. I've studied finance and investment for
many years, have been an investor in many different vehicles, and it's all a trade-off between risk
and return. The mortgage lien, when properly executed, is absolutely excellent; I don't know any
investment available to the public that has that match of investment return versus risk.
You may hear about people who go into venture capital funds and make 40, 50 per cent, but
most individuals can't take part because they don't have the minimum investment--usually one million
dollars or more--required. Minimum investment with most private mortgage originators is fifty thousand
dollars. You won't make a 40 or 50 per cent return, but you will make a solid, guaranteed 14 to 18
percent, which is superior to most other investments. That amount of yield can go a long way toward
making your retirement both secure and more comfortable than you ever dreamed.
If you have any doubts, just ask my in-laws--when they get back from Europe.
Don Konipol is owner of Wolverine Mortgage Partners, LLC and manager of the Managed Mortgage
Investment Fund, L.P. in Houston, Texas. . Contact him at (832) 577-8838 or firstname.lastname@example.org
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