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Collateralization of Working Assets

So you have assets but you don’t know how to get 50-100% returns. You are happy with the 8-12% returns your stocks typically give you… Think about this… What if I told you that the smaller local banks are in the business to lend money to credit worthy people—would you believe it?

What if I told you these same small local banks like to originate and service mortgages for these same credit worthy people. These small banks typically only will loan money for 20-25 year terms—not too many 30 yr mortgages with these banks.

Years ago (94’) I bought (2) condos for 25K apiece or 50K total. The units were rented for $340 each per month and their tax assessed value was 33.3K apiece. I felt their true market value was about 35K apiece. The owner was a “don’t wanter”. The problem is I did not want to cash in my Janus Fund mutual fund (my only liquid assets). It was earning about 15% per yr and I felt diversified with a mix of stocks and real estate.

So here is how I worked around the problem:

I called Janus Fund and had them issue me a “stock certificate” like document for my 727 shares of Janus Fund. I took this “working asset” to the bank, as well as a current credit report, and contract for my deal to buy the 2 condos. I pledged the stock certificate as collateral for the down payment and closing costs. The bank then gave me 100% financing for the entire purchase price. If I had defaulted on the loan the condos and the Janus Fund stock certificate would have been liquidated to make the bank whole. I didn’t default. The renters continued to pay rent on time and I “processed” their rent checks and paid my mortgage. My ROI on this deal was well over 100%...consider this:

1. I bought and walked into 20K in equity using 17K in stocks as collateral
2. The real estate appreciated and continues to appreciate at about 3% a year ~ $2100 a year
3. I got a nice depreciation write-off (and still do—this one last for 27.5 years)
4. Cash flow—these units now rent for $425 and are long since paid for—it is time to cross collateralize them for a larger rental property…that is called pyramiding
5. Equity paid in with each monthly payment my tenants pay for me (thanks guys)
6. Enhanced credit worthiness…as units pay themselves off your debt/income ratios become stronger. In addition, lenders get a “warm fuzzy” that you know how to buy and manage rental properties so future deals get easier and easier to get through the loan committee process. Build strong business relationships with those lenders!

Think about it…