Should I invest in asset based lending?

Question

Hi BP!

I have finally divested in nearly all of my real estate portfolio this year, along with a couple of my businesses. After years of re-investing every penny, I am liquid. I sold since I got excellent deals on all the assets, relocation across the country, and wanting to cash out during a hot market. This of course leaves me with little passive income for the time being.

My mindset right now is simply to make small passive returns (5-10+%) on some of the cash I have for the next 6-24 months. The shorter the investment term, the better. The goal is to be liquid when I find new investment opportunities during the next market downturn (real estate & small businesses). Until then, I'd like to collect more than the 1.6% interest that my SoFi money account pays. What is the best way to do this?

I have sold one of my businesses with seller financing. I got 30% down, and get 10% interest on the rest with a 5 year amortization. However, the buyers do plan to refinance soon, providing me full liquidity on this sale as well. This was great for me as it gave me a decent return for cash that I had no other plan for but to sit in the bank, and it gave me a quick exit as the buyers are motivated to refinance to better terms. This was also my business and I knew the financials, and knew it was/will do well for me to have very low risk in providing this loan. Recently a real estate investor that I know had put out the idea of a short term loan backed by the real estate as well. Performing notes with short terms left are another thought I had.

Not exactly interested in getting heat for why I sold my investments, recession timing, when to invest, etc., but more so what medium I should invest in right now given the returns I am looking for in the short term.

What are your thoughts on these asset based loans as a private investor? Any good/bad experiences doing this? Best approach to finding these deals? How tough is it really to go through the process of gaining control of the asset if the lendee defaults (real estate)?

Thank you all in advance!

John Powell · Answer

Talk to the investors you know from your previous portfolio. They may need $ or know people who do. Talk to wholesalers they will know people who want the sub $100k loans. I have had success getting 10% plus on short term loans with 70ish LTVs under $100K it is a dead zone because it is a lot of work for low total returns.  A 50K loan will make around 10K in two years with 10 hrs of work on the front side but you still have to babysit the borrower along the way sometimes. I enjoy the work hearing about friend's deals. Definitely semi-passive.

Tamara Deering · Answer

@Ujwal Velagapudi

If you check the market place on BP there are always a lot of people looking for financing.  I would check out the people who are local to you, check some of their posts on BP and see if they attend meet ups.  If you are going to lend money this directly you are definitely going to want to meet the people and see some of their projects. You may also be able to check people out on crowd funding sites but I still think you will want to get to know the person before you hand over $50 - $75K.  Another thought is that if you know or could meet local mortgage brokers they would be a good starting point, they usually have clients who don't meet the standard lending guidelines that you could help fund.

Chad U. · Answer

@Ujwal Velagapudi

Congrats on the sale of your businesses and real estate holdings.  One area you may want to look into is buying performing notes.  This is a semi-passive way of investing where you can achieve a 10%+ IRR on your funds.  However, do get some education before taking the plunge and buying a whole swath of them.

Tamara Deering · Answer

To invest directly with most asset based lenders you will need to be an accredited investor.  You can finance short term loans directly to individuals you know but ensure you have a good real estate attorney draw up the contracts so you are protected.  One area that seems to have a funding gap is hard money loans under 75k.  If you were willing to play in this space I'm sure you would have a lot of options.  Finally, I think your idea of buying  performing notes with short windows remaining is a good one.  One final piece of advice, contact your tax advisor or financial planner about the best strategies for short term investments so you don't undermine all of the work that you have done to achieve so much with your real estate business.

Ujwal Velagapudi · Answer

Thank you for the insight, @John Powell! I was thinking I could give out a few smaller loans and diversify the loans, but that is true, it will still be the same effort to babysit the borrowers. That's a good tip on reaching out to wholesalers and others outside of just investors that could help with leads.

Ujwal Velagapudi · Answer

Thank you! Will definitely reach out to the local community as well as see options on BP.

Ujwal Velagapudi · Answer

Thank you both!

@Tamara Deering I was thinking within that $50k-75k market for hard money loans, that would definitely be something I could do. What would you suggest is the best avenue for finding/offering these deals? Just local RE meetups and events in areas I know the market?

@Chad Urbshott Notes I thought would be extremely passive, did you have any particular experiences which makes you say they are more semi-passive? How do you go about investing in notes yourself? Do you buy all over the country, just based on financial due diligence and an inspection, or within your local market where you see the building and have an opportunity to step in if there is any default?

Should I invest in asset based lending?

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