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You have worked hard, and have invested wisely. You have stocks, bonds, a CD, an IRA and
maybe even a savings account or a money market account. So then, how happy are you with the
returns you are earning from each investment vehicle?
As of October 23, 2007, Bankrate.com shows a 5 year CD with a 4.65% return, an interest bearing
checking account earns a rate of 2.2% and a Money Market Account shows 3.61% interest. Now,
your IRA and stocks may perform better. Maybe you are getting 4 or 5% annually with these
vehicles, hopefully, your return is much higher than this.
Now, you might be asking yourself at this point is: Well, are there better returns to be made out
there? The answer is ABSOLUTELY!! Let's take a step back first, and look at the tools we have
discussed so far.
What is a stock? It is a basic ownership interest in a given company. Basically, it gives you the
opportunity to earn dividends, or payments, from corporate profits. This is a very simplistic view of
stocks. Bonds can be backed by the government and corporations amongst other groups. They
can be a very complicated investment tool, again, which typically pays a small rate of return. CD's,
or Certificates of Deposit are another very common choice in which to invest. Many institutions
offer them with different maturity dates and interest rates. Savings accounts and interest bearing
checking accounts can also be found at banks, savings and loan institutions, credit unions etc.
Finally, IRA's are one of the most, if not the most, popular choice to prepare for retirement. We will
focus on this tool more in a later article.
We have spoken about a few of the many investment vehicles available. We all can agree the
returns these are often quite low. So what else is there? What would you say if I told you there is a
way to get an 8% or better secured return? That's right, 8% or better is possible. Many times, this
is addition to extra tax benefits you can receive as well. So what is this mystery investment? Direct
lending, specifically, in real estate.
What is direct lending in relation to real estate? It is when you have money available and you
invest it any number of real estate projects with either an equity share partner or as a debt partner.
This does not necessarily mean you have to find a property, repair it and sell it, or find a
commercial property to buy and hold or reposition. Let's look at debt partnering first.
Many real estate investors utilize direct lenders, or private money, to get into various deals. It
could be to buy a foreclosure property, renovate it and then sell it to any number of end users. It
could also be an investor buying a multi-family property because of the strong cash flow it will
produce and the direct lending allows the investor to use these funds as the down payment on the
property. As a debt partner, you will typically receive anywhere from an 8-10% secured return.

2. Your investment is secured by the property and a mortgage you place on the property. So if you
invested $100,000 with a real estate investor who buys a 50 unit building, with an 8% return, you
will receive $8,000 per year. When the investor sells or refinances the property, you receive your
$100,000 back in addition to your annual $8,000 payments.
Equity partnering is a little different. First, your investment is still secured by the real estate, but
you participate in the monthly cash flow and receive a share when the property is sold or
refinanced. Let's look at the previous 50 unit apartment building. You use the same $100,000 to
buy the $1,000,000 property, but this time, you would get a percentage of the cash flow each
month. In this example, we will say the monthly cash flow after all expenses is $3,000 per month.
This number will obviously differ based on the strength of the deal. You put up 10% of the
purchase price, so conventional wisdom would dictate you receive 10% of the cash flow. This may
or may not be the case. Many, many times, you would receive more. Yes, more. As a real estate
investor, I want my direct lenders to want to lend with me. So I will consider giving a higher
percentage.
Let's for the sake of argument say you receive 20% of the cash flow. In this case, you would
receive $600 per month. This is $7,200 per year, or, a 7.2% return per year. This is still a good
return compared to 4.65% in a CD. However, there are 2 other things to be excited about as an
equity partner. First, is your share of "rental losses". Losses, are you crazy? I hear you thinking it,
or maybe even saying it!! A quick lesson in taxes is in order.
When an investor buys a rental property, the IRS allows the investor to recapture the purchase
price of the property over a designated period of time. For a commercial property, it is a 39 year
period, for residential, including apartments, it is 27.5 years. This is called Depreciation. The IRS
also allows Accelerated Depreciation on the personal property, or Chattel, in the building. This
requires a professional Cost Segregation Study to utilize this strategy. Chattel With Us is very
good and you can get them on the web at www.ChattelWithUs.com. Now, this depreciation is on
the entire purchase price minus the land value.
Now, depreciation is an expense on paper only. You do not write a check for it. However, for tax
purposes, you write it off. This can often times take a rental property and have it show a loss.
Again, this is for tax purposes. You can take this "loss", and use it to offset other income. Now,
you must ALWAYS consult your tax professional in regards to this. I am not an accountant and
offer no tax or legal advice. These losses are then passed through to the equity partners in direct
proportion to their interest percentage.
The second benefit to the equity investor is a percentage share of the appreciation of the property
during the holding period. Let's assume the property goes up in value each year it is held. We will
say for the sake of argument the property appreciates 3% per year. This is many times a very
conservative number, especially when there are "value plays" which allow forced appreciation at a
higher rate in a shorter period of time. So, our $1,000,000 property will be worth $1,159,274 after a
5 year hold. This was in determined increasing the value by 3% each year. As the private lender,
you would receive 20% of the appreciation, or $31,855.
Add $31,855 and 5 years of cash flow totaling $36,000 and the total you would earn over the 5
year period is $67,855. Divide this by 5 years and your annual return averaged 13.57%. This does
not include the additional tax benefits from the "losses" on rental income. These are not pie-in-the-

3. sky figures. Smart investors are seeing these returns on a consistent basis all secured safely by
real estate.
Whenever you are considering where to put your investment dollars, not enough could be said
about doing your due diligence. This is a mantra for real estate investors and should also be yours
when investigating any opportunity. So what should you look for? First, you should only invest with
someone who is in compliance with applicable SEC regulations and rules. This would mean real
estate investor has utilized an SEC Attorney to properly adhere to laws effecting the transaction
AND is putting your financial interests first. There are a great deal of regulations effecting a
transaction such as this. A full discussion of these regulations could not be adequately discussed
in this article. You would be best served to only deal with those who comply with these regulations.
Second, contact your own legal and tax advisors so they can see what you are doing. Let these
trusted advisors guide you through the transaction. Next, become familiar with the numbers in the
deal. You will be presented with an offering which should outline the specifics of the deal. Ask
questions about the deal. The more information you have, the better decision you can make.
There are better ways to invest and with much better returns. Embrace the possibilities and put
more money in your pocket!
John Racine is the President of Chattel With Us, LLC a Florida based nationwide company
offering Chattel Appraisal's to real estate investors. He has been investing in real estate for 6
years in the Central Florida area. You can contact John or Chattel With Us, LLC at 866-788-4925
or info@chattelwithus.com or reach them on the web at http://www.chattelwithus.com
Article Source:
http://EzineArticles.com/?expert=John_Racine
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For more tips on Safe Mortgage Investing go here:
www.Mortgage-Acceleration-Map.com
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