Private lender or real
estate: Exploring the pros
and cons of these
investment
types
“If the renter cannot meet the arrangements, three months missed payments can easily materialize.”
The real estate example:
There are not many investments available that measure up to buying debt contracts at a discount. Many Investors feel that real estate investments are the best type of investments in the market. Therefore, we will compare a debt consolidation purchased at a discount, to the purchase of a long-term portfolio rental investment property, that many would consider a great investment.
The following example is what many investors consider a great real estate investment:
A home is purchased for $400,000.00.
This investment requires a 20% down payment of $80,000.00.
With $80,000.00 initial investment, you will inherit a mortgage of $320,000.00.
The mortgage payment you are responsible for is $1,500.00 a month.
Your goal would be to rent this home out for $1,800.00 a month.
Once you obtain your goal of renting it out for $1,800.00 a month, there would be a $300.00 a month positive cash flow, not taking taxes into account.
This is what many consider to be a great investment.
but…
When you look at it closely, if this investment does not go as planned, the result can lead to huge economic setbacks, even bankruptcy, in the worst case scenario.
If the renter misses one payment, there go six months of profit. We all know that the first payment missed can easily lead to three months missed before the eviction becomes official. In general, most renters will make arrangements to catch up with their landlord over the next 30 days. If the renter can not meet the arrangements agreed upon, three months of missed payments could easily materialize. This would mean you are now out $4,500.00 ($1,500.00 x three months).
To bring this scenario to the next level, if the renter damages your property, much more than three months missed rent could be at stake.
You can now see how this will take away your original plan of $300.00 profit a month.
“We can achieve huge discounts.”
When owning real estate, even if you have a great tenant, scenarios such as broken water tanks flowing into the basement for hours while the tenant is at work, are huge setbacks.
Now, when compared to buying debt at a discount, the above real estate investment does not seem so solid, or safe.
In many situations, when a debt is in a collector’s hands or soon will be, we can achieve huge discounts. Why? The collector bought the file, not the debt, therefore the collector does not have proof of ownership of the debt.
Here is another example:
We have secured the following terms and conditions with a client whose debt we are consolidating:
Principal $14,000.00.
Interest rate 19% (will rapidly increase via discount).
Amortized over 3 years.
The monthly payment will be $513.18.
We now commence conveyance, and because we are private lenders, we are expected to ask for proof of ownership of the debt.
This debt can be easily paid out or bought from a collector for $8,500.00.
Why? Because the collector does not have proof of ownership of the debt.
Your yield has now rapidly increased to well over 19% due to the fact you bought the debt at a discount.
In three years, the total interest paid is $4,474.63.
The principal of the loan is $14,000.00, which you bought at a discount for $8,500.00.
In this average debt consolidation example, you would receive $18,474.63 ($14,000.00 + $4,474.63) in three years.
In conclusion:
Using the debt consolidation investment model, your initial investment is $8,500.00 and the cash flow received would be $513.18 per month.
With the real estate investment model, your initial investment would be $80,000.00, and the cash flow received would be $300.00 per month. You are also then responsible for a $320,000.00 mortgage with $1,500.00 monthly payments with an asset that can be destroyed, or in a recession, the home could become upside down, where the mortgage is more than the market value.
If you are considering real estate as an investment, you should instead invest in our discounted debt contract model.
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Click here to read another comparison: Buying and selling debt vs. business purchase.