Re: Let Genie Out of Bottle w/Liquid Paper! - Posted by David Butler
Posted by David Butler on September 18, 2007 at 09:01:43:
Hello Jimmy,
Great post! Really enjoyed reading it. Wanted to offer one quick suggestion to your very last sentence regarding your desire to avoid having your cash “bottled up in notes”. Two things come to mind - the first being related to leverage rather than just notes. One of the strengths of your investing history here is the apparent balance in what you do with regard to avoiding “overleveraging” - which is the backbone of the “pyramiding assets” technique of real estate investing and a valuable lesson for budding investors to learn from.
On a more note-specific application, many of us use credit lines to purchase notes, and profit from the spread, thus leveraging the notes we purchase, by way of hypothecation.
However, while notes themselves aren’t liquid cash, in the hands of a skilled real estate investor - they can be, and often are, better… to the point that much like you are handling your rehab refinancing, you have many ways to turn notes into cash, and often at huge yields that make whatever time your cash is “bottled up” more than worth the effort.
This is especially so when already successful at operating in the manner you are presently following - and even more so still, in a market experiencing a liquidity crunch such as the mortgage meltdown we are facing now. In fact, investors having this knowledge and skill set will play a big role in helping to solve the liquidity crisis swallowing up the market now - by understanding how to inject “liquidity” into a marketplace whether using cash… OR NOT!!!
Some of the best real estate deals I have seen - and a favorite technique of Terry Vaughan, John Behle, Mike Morrongiello, Tom & Roberta Standen, Phil Camenisch, Bruce Pollock, myself, and many others - is trading paper purchased at discount, for full value on the purchase of still more real estate.
Other times, a note(s) can be used simply as “additional collateral”, functioning as a deal sweetener when pledged to support an otherwise cash “thin” offer to a property owner, where you are asking him to carry back a very HLTV mortgage. Judicious use of installment sale on one property, and installment purchase on another, can on occasion provide better results than a 1031 exchange, and enjoy similar tax-deferred benefits as well.
Another scenario is where you are attempting to get a seller to “walk the mortgage” (the new seller carry back mortgage note to be created) over to another property you presently own - and the Seller wants more security to do so! This can often be the case if you are holding on to vacant land, or lower rent property that the seller is not enamored with - or where the seller is hung-up about “wanting to be completely free of the property”.
The reason you are doing this of course is to grab the new property free and clear, so you can then refinance it when you desire - and pull cash out of it.
It can get even better when used in conjunction with using Land Trusts to “sell” your properties, and taking advantage of IRS Rev. Rul. 92-105 which classifies the “paper” of a beneficial interest in a land trust as “like kind”, rather than as taxable “boot” (one problem with notes is that when given to “balance equities” in a 1031 exchange, the value given/received is often-times taxable to both parties.
The strategic use of land trust “paper” as opposed to “mortgage paper” is an additional tool that is extremely effective when part of your strategy “before-the-fact”, such as when you know that you will occasionally “harvest” some of your rental home portfolio to generate more paper. The nonrecognition of gain or loss from exchange of a beneficial interest in Illinois land trust offers some powerful advantages for pyramiding assets through exchanging up, when you already know as part of your objectives, that you will be continuing to
My apologies if you are already aware of this - but I felt it was a valuable addition for other visitors who are already benefiting from your own experience here. Best wishes for your continued success, and Keep…
Having Fun For A Living!
David P. Butler
www.hotspurinvestmentgroup.com