Holding companies that pay you 5% per month on your $$

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Hello, I am going to purchase a house here locally to move into and get my kids into a better school district. I have found what appears to be a discounted property and am in negotiations. I just ran into an old friend that just started doing real estate investing. He bought a big house to move into on the cheap, pulled the equity out at closing using a gift program, then gave the $$ to a holding company supposedly backed by real estate and hard money loans. Apparently they pay him 5%/month on the $150,000 he invested and the $7500 he gets pays for his piti, house expenses and he still has $1500/month positive cash flow on his owner occupied house. He just bought a rental and supposedly using this set up he will make $4000/month positve cash flow after it is rented in an area that usually only produces break even cash flow.

Anyone heard of these "holding companies"? Are they a total scam or do some legitimate ones actually exist? I wonder if they will pay him back $100,000 then tell him the investment has gone bad and so sorry. If there is a way to search out other similar companies i would be interested.

Divot[/b]