Pcg.Financial Planning Ce Presentation

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%+

Premiere Commercial Group, Inc. 8

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


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


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


Credit Crunch = Opportunity

Banks’ tighter credit standards mean fewer borrowers qualify

PCG can tap many attractive lending opportunities ineligible for bank loans


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


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


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.


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


Financial Planning Case Studies

1. Enhance Fixed Income Portfolios

2. Diversify Over-Weighted Equity Portfolios

3. Healthcare in Retirement Issues

4. Longer Life Spans


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



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


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


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


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


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


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


4. Longer Life Spans

QUESTIONS?


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


Investments/Lending Contact

Ralph Abbott [email protected] 614-339-4255 ext 1001 www.premierecommercialgroup.com

Pcg.Financial Planning Ce Presentation

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