Balloons and Creative Finance

[Ben Leybovich]

I'll likely write about this on the blog in more detail, but this week I closed on a refinance of the last private money balloon that I had...  Brandon Turner tells me I can retire now, and while I don't know about that, there is a measure of truth to how my friend thinks.

Creative finance, at its' core, is simply understood as finding ways to enter property without money.  Money is the greatest obstacle most of us have, after all.

Well - to accomplish this, Private Capital becomes paramount.  Private capital, combined with banking relationships, allows us to enter transactions with 100% leverage.

However, the thing that a lot of folks miss is that you must know your exit before you enter. And when utilizing private money, either debt or equity, the time-frame of the exit is a function of that private money wanting out - most often rather quickly!

Personally, I've bridged, cross-collateralized, substituted security, forced appreciation, and more in order to facilitate timely exit of private capital.  But, fundamentally, this is not a risk-free proposition, as a refinance and/or sale of the asset on a specific time-line not only drives the investment returns for private money, but on the debt side is contractual to boot. 

This last one was the Symphony 10-unit that I wrote about. It was bought for $373,500 in 2013. It appraised last week for $450,000. I was able to wrap close to $100,000 of private debt together with a bank note into a $351,000 new note. The thing made a mere $3,000 in 2013 due to crazy CapEx investment on my part. It made $12,000 in 2014. Through this refinance, I was able to lower monthly debt service by about $135. I am targeting $15,000+ of CF in 2015. I put $100,000 on my balance sheet to boot.

But, mostly, everything in my portfolio is now fully amortized!  Creative finance works, but you have to be thoughtful and knowledgeable...

Exhaling now...