“basically, my LLC is borrowing money at say 5% from people. That’s all the people know and care about. They know that their money is going to be secured by a 1st mortgage in real estate.
The LLC takes the money, let’s just say it comes out to $100,000, and lends it to someone at 10% as a 1st mortgage.
Every month the LLC gets paid around $800 and it pays the people $400, therefore making $400.“
A man after my own heart! Great work Ken. Using the money of risk-averse investors to make yourself money. The only thing I’m leary about in this particular scheme is the amount of risk involved. I suppose a simple title search will tell you that there are no other mortgages on the property. But, these are high-risk clients, I imagine since they are paying 10% interest, so the chances are higher that they could default. If they do, the principal is guaranteed, but there will be significant lawyer fees associated with the sale of the home and issuing foreclosure documents. These are unrecoverable.
In my scheme, I’m thinking about using investment money to buy investment properties. Thus, I would leverage their money by putting 25% down, and generate cash flow with a ROI of around 30% on that money. Then, I would pay them about 7-10% giving me some padding in case of unforseen expenses, vacancy rates, or market fluctuations. The investors would become Class B shareholders in the company. I would keep all the generated capital in the corporation for investment in further properties.
The hard part is convincing the investors, and finding the right properties.