Post on 11-Jun-2015
Trust Deed Investing
An alternative Approach for Today’s Complex Investing Environment
Agenda
• Introduction• The case for Alternative Assets• Trust Deed Financing• Case Studies – Innovative Approaches to
Solving Financial Planning Issues• Audience Q and A
Equities have underperformed “The Lost Decade”
Total Return on $10,000 invested in the S & P 500
April 1999 through March 2008
Source: Wall Street Journal, March 26, 2008
Diversification is becoming more difficult
Correlation of Standard Domestic Equity Classes*
Large Growth Stocks
Large Value Stocks
Small Growth Stocks
Small Value Stocks
Midsize Growth Stocks
Midsize Value Stocks
Large Growth Stocks 1.000
Large Value Stocks 0.799 1.000
Small Growth Stocks 0.822 0.653 1.000
Small Value Stocks 0.689 0.792 0.853 1.000
Midsize Growth Stocks 0.924 0.720 0.944 0.772 1.000
Midsize Value Stocks 0.754 0.953 0.712 0.888 0.739 1.000*Correlation Coefficient Dec-1986 to Jun-2007
□
Alternative Investments Can Help
Correlation of Alternative Equity Index Classes*
Technology Energy Financials Healthcare MaterialsReal
Estate
Technology 1.000
Energy 0.341 1.000
Financials 0.514 0.432 1.000
Healthcare 0.536 0.331 0.586 1.000
Materials 0.527 0.583 0.640 0.508 1.000
Real Estate 0.286 0.334 0.522 0.343 0.489 1.000*Correlation Coefficient Dec-1986 to Jun-2007
Current Fixed Income Environment
• Low interest rates• Declining Yields• “Safe” Bond Funds exposed to Sub-
prime• Some markets becoming illiquid
An Alternative Approach:Private Mortgage Financing
• Known as “Private Money” lending• Niche market for borrowers and properties
that do not meet typical institutional lending requirements
• $ Billions in private money loans made annually
• Typically offer high returns to investors ~ 10%+
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What is Private Mortgage Investing?
Private Mortgage investing is very similar to a bank writing a mortgage.
Except: You are now the bank. You receive the monthly income. You have a lien against the land or project, until your
principal and your stated return is paid in full
Trust Deed Investing• Not Sub-prime• Not a derivative security• Direct lending, individual Deeds of Trust• Loan to Value ratios low• Quality, well-underwritten loans• Short-term in nature• Quick response
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What Current Investors Like About Private Mortgage Investing
Relatively secure and predictable, but returns beat inflation significantly
Monthly income rebuilds wealth Simple, transparent Like RE investing without the hassles of
ownership…
….and with the benefits of relative liquidity
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Private Mortgage as a Lower Risk Proxy for Real Estate
Mortgages are tied to RE – benefits of collateralization with hard assets, but risk is shared with borrower
Smaller minimum investments – easy to achieve true diversification across multiple projects
Unlike direct real estate investing, returns are immediate and stable
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Credit Crunch = Opportunity
Banks’ tighter credit standards mean fewer borrowers qualify
PCG can tap many attractive lending opportunities ineligible for bank loans
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What Are The Advantages?
High Yield on Investment Collateral – Invested capital is secured by real
estate with an appraisal, title policy, recorded lien, and hazard insurance
Minimal Management – All underwriting, servicing, and, if necessary, foreclosures are handled by highly experienced professionals.
Monthly Income – Interest payments are due every month
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What is the Standard Structure?
The standard investment opportunity consists of a note and mortgage in the 1st lien position that will encumber investment property owned by the borrower. The standard terms of the note are as follows: 12 – 24 month maturity Monthly interest rate 65% loan to value Personal guarantee from borrower
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What Are The Risks?
All investments involve risk. The risk of a real estate note is default. However, the risk of loss is a function of recovery – i.e. foreclosure and subsequent sale.
Default risk is mitigated by strict underwriting and insisting on a least at 35% equity cushion in every loan
Other risks include a drastic change in market conditions and the length of time it takes to recover a property and liquidate it.
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Extending Tax Advantages – RIA Accounts
Private mortgage investments combine stability with regular, substantial yields – an excellent combination for self-directed retirement or education portfolios
Income accumulates tax free until withdrawal – taking full advantage of tax deferral on income
Reasons for Borrowing
Demand: Timing
Does not meet standard guidelines:• Relocation issues• Purchase escrow bridge loan• Emergencies: cash needs for alternate use• Purchase financing falls out at the 11th hour on
new acquisition• Sale of existing residence falls out at the last
minute
Does not meet standard guidelines:• Non-owner occupied cash out required• High land value to improvement• Property type – Not a 1-4 unit residential
Demand: Property
Does not meet standard guidelines:• Divorce• Liens/Judgments• Borrower in denial• Opportunity cost saving,
e.g. save money elsewhere by moving quickly or business opportunity
• Family issues – medical, death, disability
Demand: Situation
Does not meet standard guidelines:• Citizenship issues – resident alien• Vesting – Corporations, partnerships and trusts• Income – unverifiable, high ratios, self employed, no
IRS 4506, stated income required• Employment – self, new, career change, new industry,
unemployed, independent contractor, or gaps in employment
• Credit – No credit scores, BK situations, questionable credit, excessive debt, multiple loans to borrower
Demand: Borrower
How Financial Planners Are Using Trust Deed Investing
“We actually use these quite a bit. We like that it is not correlated to the stock market and position this as an exclusive, private investment that only our clients have access to. To us, these trust deed investments are a key tool in our portfolios.” – Wealth Manager, $260 million AUM
“I handle it as an alternative asset: high yield fixed income with its best selling point being both the yield and its low correlation with other market assets.“ – Financial Planner, $750 million AUM
“When we use this vehicle I call it high yield, and make it part of my bond asset class, separate from, and therefore adding to diversification, any other bond type.” – Wealth Manager, $1 billion AUM
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Financial Planning Case Studies
1. Enhance Fixed Income Portfolios
2. Diversify Over-Weighted Equity Portfolios
3. Healthcare in Retirement Issues
4. Longer Life Spans
1. Enhance Fixed Income Portfolios
Current Situation: $1 million conservative fixed
income portfolio Money markets, Treasuries,
short term bond funds 4% blended rate of return,
$40K income
Key Issue: Client needs additional income
For illustration purposes only. Hypothetical examples that are general in nature and do not take into consideration individual circumstances, tax, legal or other issues.
Solution Allocate 25% of portfolio towards
Trust Deeds returning 10%
Result: New blended rate of return is
6.25%, yielding $62,500 Allocate incremental $22,500
towards goal Further diversified portfolio Maintained liquidity and
conservative portfolio profile
For illustration purposes only. Hypothetical examples that are general in nature and do not take into consideration individual circumstances, tax, legal or other issues.
1. Enhance Fixed Income Portfolios
2. Diversify Over-weighted, Equity Portfolio
Current Situation: $1 million aggressive portfolio Tech, small cap, growth stocks in
poor performing funds and money markets
1% blended rate of return over past 10 years
Key Issue: Client needs higher returns to
fund long term goals and further diversification to lower risk
For illustration purposes only. Hypothetical examples that are general in nature and do not take into consideration individual circumstances, tax, legal or other issues.
Solution: Allocate 20% towards mortgage
pools
Result: Diversified portfolio to 70-20-10 Enhanced return of portfolio to 7% Lowered portfolio risk through
diversification Maintained aggressive return
portfolio profile
For illustration purposes only. Hypothetical examples that are general in nature and do not take into consideration individual circumstances, tax, legal or other issues.
2. Diversify Over-weighted, Equity Portfolio
3. Health Care in Retirement Current situation:
Client aged 78 is experiencing healthcare issues Spouse, aged 70 is in excellent health Due to increased costs ($50k), conservative retirement portfolio (5% return)
projected to be depleted within next 10 years
Key Issue Clients need increased return to stretch portfolio for surviving spouse, while
maintaining liquidity and conservative risk profile
For illustration purposes only. Hypothetical examples that are general in nature and do not take into consideration individual circumstances, tax, legal or other issues.
Solution: Allocate 30% of portfolio to Mortgage Pools returning 10%
Result Increased blended rate of return to 7% Stretched retirement portfolio out to 2025, when surviving spouse is 88 Maintained conservative portfolio risk profile and liquidity
For illustration purposes only. Hypothetical examples that are general in nature and do not take into consideration individual circumstances, tax, legal or other issues.
3. Health Care in Retirement
4. Longer Life Spans Facts:
Clients aged 75 are in excellent health Family history of living to 90+ Current conservative retirement plan constructed to return 6% to fund
retirement based on life span of 85 Clients worried they will outlive assets
Key Issue Clients need increased return and liquidity to ensure portfolio funds lifestyle
through age 100
For illustration purposes only. Hypothetical examples that are general in nature and do not take into consideration individual circumstances, tax, legal or other issues.
Solution: Allocate 35% of portfolio to Trust Deeds returning 10% Reduce lifestyle expenses
Result: Increased return on portfolio to 7.5% Maintained conservative profile and need for liquidity Stretched portfolio to age 100
For illustration purposes only. Hypothetical examples that are general in nature and do not take into consideration individual circumstances, tax, legal or other issues.
4. Longer Life Spans
QUESTIONS?
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How Do I Participate?
Partner with a firm, like PCG, who:
Doesn’t charge any fees to investors That will do all of the work for you Professionally manages your investment Maintains the highest integrity and a diligent
ethical culture
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Investments/Lending Contact
Ralph Abbott Rabbott@premierecommercialgroup.com 614-339-4255 ext 1001 www.premierecommercialgroup.com