Tighter restrictions on bank lending have crimped the styles of real estate investors as much as they’ve hurt wannabe homeowners.
But the investment-capital vacuum has sucked in a strong stream of private money, including the retirement funds of ordinary people.
Investor Chris Yates of Denver-based CM Yates said he has borrowed more than $10 million from about 35 individuals in the past three years.
“We rely heavily on IRA (individual retirement account) money. That’s where a lot of people have most of their liquid assets,” he said.
Every few weeks, via e-mail, he alerts a group of investor prospects to specific lending opportunities. They can lend from as little as $10,000 to more than $200,000, typically at interest rates between 8 percent and 15 percent sweetened by one-time bonus payments of 1 to 5 points.
The rates are not guaranteed — federal securities law doesn’t allow that, according to Yates. The loans are secured by deeds of trust, with second-position notes yielding higher rates than those linked to safer first-position notes. Properties are leveraged at no more than 80 percent.
Though such arrangements are catching on, some financial advisers warn against the use of leverage in an IRA, and individuals considering such an option should thoroughly research the risks of such arrangements.
Even with that in mind, smaller investors and even first-timers are getting into the act of pairing up with money partners.
Joe Stevens of Colorado Springs met Jane Shafrin in March at a local mentoring group run by investor Michael Jake. Three days later, he borrowed $70,000 from Shafrin’s IRA and closed on the purchase of a bank-owned property for $83,000.
He spent 10 weeks and $25,000 rehabbing the home and then sold it for $144,000. After broker commissions and other costs, Stevens netted a $13,000 profit. Shafrin was paid $4,100 in interest and points.
Both parties have done subsequent IRA-funded deals.
“I’m looking to borrow money from someone else’s IRA,” said Shafrin, who previously acted as Stevens’ money partner. Her own funds are now tied up in two investment properties.
“The fun thing about the business model is you can sell a totally revamped house for less than the existing homes in the neighborhood,” Stevens said. “My competition is the guy who’s been living in the house with the worn-out carpet across the street.”
Rather than borrowing, small investors with no track record of repayment sometimes offer their partners a share of equity ownership in the property.
“I dislike equity shares,” said Yates, who can afford to avoid them. Whether the deal is a long-term hold or a fix and flip, the upside isn’t known until it’s time to sell. The principle may promise 25 percent or 50 percent of the profit, Yates said. “The question is, 25 percent of what?”
The best of both worlds — upside potential and a healthy interest rate — is the reason for a hybrid investment vehicle launched recently by Yates’ firm. The CM Yates Real Estate Fund is a “private placement” regulated by the Securities and Exchange Commission. Investors will purchase private shares of stock secured by separate portfolios of 30 to 40 income-producing properties in metro Denver.
