Sounds like a unicorn investment that doesn’t exist in this crazy real estate market. However, I can assure it does. Below is this exact investment we just purchased!
When I tell people I run an investment group where we purchase mortgages for a discount, they usually look at me funny. If they don’t walk away in confusion, they may ask why or how?
If you want to know how, you’ll have to come to one of our meetings or give me a call. If you want to know why, then continue reading.
Here is how we structured this investment to turn a 5% interest rate mortgage into a 10.25% return and $60,000 instant equity:
- First, we performed a fair market analysis to make sure the underlying property value was worth more than the existing mortgage balance of $156,019.55
- FMV= $170K to $190K
- Second, we reviewed the mortgage files to uncover why the mortgage could be purchased for a discount.
- Financial institutions (banks) have no incentive to sell a mortgage for less than what is owed if the borrower has always performed on their mortgage.
- The opportunities we target are reperforming or modified mortgages that can be purchased at a significant discount
- Third, our investment group purchased the underlying 1st position mortgage on July 14th 2020 for $94,000.
- Principal/Interest payments = $858.92 per month for the remaining 340 payments
- $94,000 Investment = 10.25% yield/return
The question you are probably asking is why would a bank be willing to lose $156,019 – $94,000= ($62,019)
The answer is the bank lost more than the $62,019 a long time ago during the Mortgage Meltdown when they sold this distressed mortgage.
In this situation, the borrower originally purchased the 2-unit property for $190,000 back in 2008. The borrower (landlord owner) also had a 7.99% interest rate. When the market turned, the borrower figured the game was over and stopped making payments which turned the mortgage into a distressed asset.
That was when an investor like myself contacted the bank and offered to buy the mortgage. At the time, the bank wasn’t receiving payments and foreclosing was a messy situation that the banks prefered to avoid.
Therefore, they sold the mortgage at a discount. The exact amount of the discount isn’t know, but I would guess it was very steep considering what was happening during the Great Recession.
The next logical step: Loan Modification
The mortgage investor and borrower (landlord) were able to put together a deal where they both could win, which is called a loan modification. The borrowers interest rate and amount owed were reduced and the mortgage investor was able to receive an above average interest (see financial illustration above for details).
During the 2008-2012 Mortgage Meltdown, tens of thousands of loan modifications like these were created. When these types of mortgages are sold to other investors it’s known as Reperforming Loan (RPL).
Before 2017, our group focused on investing in college rentals as landlords. Now our focus has shifted to selling our properties and purchasing discount mortgages.
Why the role reversal? Or to be better put; why the risk reversal?
Landlord vs. Mortgage Investor…Which side offers the best return for the least amount of risk and time?
After the landlord is done mowing the lawn, fixing clogged toilets, and replacing an old water heater; he then needs to collect the rent, pay taxes & insurance, and pay the mortgage of $858.92 every month. If he is lucky, he makes a few dollars for his effort.
“The secret to success is to own nothing, but control everything.” – Nelson Rockefeller
On the other hand, you could be the mortgage investor and make 10% on your money with very little effort and liability.
- If the landlord/borrower decides to sell or refi you’re in position to make over $60,000 on your investment.
- $156,019 mortgage balance – $94,000 investment =$62,019 gain
- If the borrower defaults you can work out another loan modification with the borrower.
- If you foreclose you have multiple ways to make money. You can sell, rent, and offer seller financing all while protecting & growing your principal investment.
If you are an accredited investor, it may be time to consider alternative investment strategies like mortgage investing. These type of investments are backed by brick and mortar real estate that offer risk reduction strategies that protect you with layers of equity.
Investing doesn’t have to be complicated. It can be as simple as pointing to a property and saying “this is where my money is invested.”
If you’re tired of the negative headlines and volatile Wall Street controlled stock market, then give me a call or email.
You can’t control Wall Street but you can control Main Street. It’s time to get back to simple investments secured by brick and mortar real estate.
Interested in hearing more? Set up a time to talk click here.
Kyle Zimpleman, Managing Member