How to increase your ROI with 'Base Hit' Investing!

It’s baseball season in American. Texas Ranger fans are hoping this is the season they go all the way. Chicago Cub fans are hungry to show the world that 2016 was not a fluke. Don’t stone me, but I for one am not a huge baseball fan. I think partly because I could never hit the ball. True confession. Part of the problem was I never took any swings because I was always wanting to hit the grand slam, the long ball, the one that went over the fence, the one that hit the score broad. It never happened!

We all come to baseball games in hopes of seeing a power hitter knocking one over the fence. When he does we hope the bases are loaded for a 'Grand Slam'. But does that always guarantee a winner?

Some of the greatest hitters in baseball don’t necessarily hit the most home runs, they hit a lot of 'base hits'. They are the smart ones. They take what the defense gives them and they place the ball in the right place to get on base and drive in runs. However, no one can deny that ‘home runs’ maybe one of the most exciting things in baseball. However, an unwarranted focus on hitting the long ball lead to too many strikeouts and stranded runners, so that it hurts — rather than helps — a team’s chances to win the game. 

Investing in non-performing notes can be like that. We’re all waiting for the home run and along the way we miss out on a lot of base hits. If we pick up more of the base hits at the end of the year, we will probably have driven in more deals resulting in more wins and ultimately a higher return on our investment for the year. Isn’t that what we want? With that said, let me share with you one of our base hits in the arena of investing in distressed residential debt.

This is a Pennsylvania asset which we will be looking to score within a few months. This is an asset where the bid has been accepted and we will be closing on by the end of the month. We paid 55% of the fair market value of this property because it was a non-performing note. Not a real beauty, but a solid base hit.

Our goal is always to work with the borrower to help them stay in the house. However, in some cases they make the choice that they simply don’t want to play by the rules and choose not to pay any longer. In this case after a foreclosure the borrower will walk away.

We have a couple of exit strategies in this case. We can do a quick sell and reap a 15% or better return on our investment within 4 months. We could also sell the house on owner financing terms and hold on to the property for a year and sell the performing note to another investor who wants passive income. This would allow us to receive all of our initial investment back. Remember we paid 55% of fair market value, but after a year we could safely sell for around 75% of fair market value to ensure a quick sell. In addition to selling for an additional 20% of what we paid, we have also received a year’s worth of payments since we are the bank. With this second option, we could also sell only part of the 20-year mortgage, say 5 years which would provide us with cash. Since the note is for 20 years, we sold 5 years of the 20 year mortgage which leaves us with 15 years of passive income beginning at year 6 for our own portfolio. This second option would provide us with a higher return on our initial investment and would be considered a home run. 

However, for us in this situation we are happy with an initial base hit and move on to other deals. Part of the reason is that there is a lot of game left in the year and we know they’re plenty more base hits remaining and we are also anticipating a ‘home run’ or two as well.

Learning to accept some 'base hits' along the way has helped us grow, instead of waiting for that one 'home run' or 'grand slam'. The 'base hits' may not receive all the crowd applause, but hopefully that is not what you're after. If you haven't got on base lately with a deal it maybe time to step up to the plate and take a swing. We are swinging more and getting more 'base hits' and I'm sure one of these swings will be a 'home run' or maybe even a 'grand slam'. See you at the plate.

Remember the 3rd Act is about to happen!