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Mar 05, 2020

GUEST BLOG: Creating Income Through Commercial Real Estate Backed Notes

One of the biggest questions asked by mature investors is – after I have reached my growth goals and am preparing to settle into my income generating stage, how do I maximize my income on what I have grown?  If we look at traditional investing we see a plethora of options available that are yielding between 1% and 4% and most people settle for these because they have been deemed safe and reliable, but is this really maximizing all the work and effort you have put in for the last 30, 40, or even 50 years? The biggest reason people do not seek alternative income producing opportunities is because they have been conditioned to the traditional model- invest aggressively through your 30s and even your 40s and begin to taper back on your risk level into your 50s and 60s. This is the model that has been taught in schools and perpetuated by those selling products of large funds and insurance companies.  Many times, they have convinced their clients that this is the absolute safest and best way to secure a good income in their retirement. What they don’t tell you is, as of October 2019, 93% of all public pension funds, 81% of Endowment Funds and 78% of Private Pension Funds invest in commercial real estate vehicles. (Investment News, October 2019). So even these fund managers see the security and opportunity in these vehicles all while taking a fee for their services and charging a fee to the borrowers of your money. You can use your self-directed IRA to invest in the same type of product as these fund managers without the fees.

We are going to answer the first 5 questions that routinely get asked by investors who choose to direct their own investments in commercial real estate notes and how you can generate 8-10% yield for increased income, while being secured by the exact same type of vehicle that fund managers are investing in today. 

So, the first question we hear is-How am I secured in a Commercial Real Estate transaction?  The simple answer is through a note or deed of trust secured by the real estate. The term Trust Deed is used in some 20 states.  In its simplest terms a Trust Deed is a vehicle used to secure a promissory note, made between a lender and a borrower, to a piece of real estate.  In the event the borrower does not pay, the lender is then receiving the collateral.  

This is then invariably followed by- If they don’t pay, I don’t want the property- I don’t want to manage anything, I only want my income. If you choose the correct manager, you will never have to manage anything- tenants, maintenance issues, property tax issues or anything that should arise from a default of the loan.  This is a passive investment that is used to generate income for you and your family. 

That sounds great but what are the risks? That’s a great question and, as with any investment, there is a risk.  Risk can be mitigated within the commercial real estate investment by minimizing both borrower risk and collateral risk.  Borrower risk is mitigated by loaning to individuals or companies that have a proven track record of completing projects on time and on budget.  Collateral risk is mitigated by ensuring that the loan to values of the project are determined and ensuring that the borrower is completing each phase of the project under the terms of the agreement they signed with you and the other investors.  As a high yield lender in a commercial real estate transaction you will want to ensure that when you invest the management company is completing the proper due diligence.  This includes appraisals, complete underwriting and defining an exit strategy. These components are paramount in the process and must never be overlooked.  

This sounds great, but why do developers need my money instead of just going to a bank? This is one of the best questions we get. The answer is really quite simple.

1. Large banks often take a long time to fund, require too much paperwork and change the loan terms on developers that have time sensitive projects.  These borrowers would rather pay a higher interest rate to get their projects completed sooner.

2. Banks are often reluctant to lend to smaller, mid-level projects.  Trust deed investors fill that gap and then typically are paid off through an institution like a local lender or a credit union.

Finally, how do I get started or how do I get more information? The best way to get started is to schedule a free consultation with our senior advisor, Tiger Mynarcik and he can advise you on how you can use your self-directed IRA to invest in trust deeds secured by commercial real estate.

Learn More from Mr. Tiger Mynarcik today

Tiger Headshot

https://www.pinnacleman.com/blog/trust-deeds/

Mr. Tiger Mynarcik has been a licensed realtor since 1991 and is a registered with the Nationwide Multistate Licensing System (NMLS) and is licensed in Nevada and Arizona.  Mr. Mynarcik has 17 years’ experience in project financing, origination, underwriting and commercial real estate valuation. He has completed over $1 billion of completed value projects in multiple states.

Currently, Mr. Mynarcik is a portfolio manager and advisor for 7 holding companies specializing in acquisition, leasing and disposition of commercial real estate assets. 

Most recently, Mr. Mynarcik has completed initial stage funding for several Geriatric Behavioral Care facilities that have resulted in an average ROI of 9.0% for investors.

Tiger resides in Las Vegas with his wife Jill. They have two beautiful daughters, Jordan and Gabby.

 

*Mainstar's role as custodian of self-directed accounts is nondiscretionary and/or administrative in nature. This information is for educational purposes only, and should not be construed as investment, legal, tax or financial advice or as a guarantee, endorsement, or certification of any investments. Mainstar encourages individuals to consult a financial or legal professional when making investment decisions. 

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