GREEN Financial Blog: Tired of Low Returns? Here are Three Financial Alternatives to Make Your Money Work Harder

I certainly don’t miss the 1970’s and 80’s with double digit interest rates (and inflation), but wouldn’t it be nice to get a little bit better than nothing on your money? I just looked and saw that 1-year CD rates are under one-half percent. Life insurance annuities aren’t much better. Those rates won’t even keep up with inflation. And wouldn’t it be even better if you could earn better returns without the roller-coaster returns of Wall Street?

 

Each of the following financial alternatives offers superior risk-adjusted returns. If you’re tired of earning next to nothing on your money, take a look at these three ideas for putting your money to work:

 

1. First Position Commercial Mortgage Notes

The name is something of a misnomer. This is a private lending opportunity for sophisticated investors. It is not a security. You are lending money to a company that is involved in commercial lending. The borrower is using that money to make commercial bridge loans.

 

As a lender, your interest is secured by a 12-month promissory note that pays monthly interest at a 7% annual rate. Every loan that the borrower makes is at a 60% loan-to-value ratio or less. As a lender, your collateral is the underlying real estate. And even if “their” borrower defaults, they are still obligated to make payments on their loan to you. These are two different loans.

 

So why do I think this is low risk? The bank’s position is always safer than the borrower’s. Their interest is secured by some underlying asset. There should only be two outcomes in private lending: you get paid your interest or you take the collateral securing the loan. The low LTV helps make sure there is a buffer against market declines.

 

Benefits Include:

  • Attractive, secured yields of 7% paid monthly over 12 months.
  • Low loan to value ratios. The property’s equity is lender’s collateral.
  • No fees or commissions. 100% of your money goes to work.
  • Lender is recorded on title in senior position.
  • Low $25,000 minimum
  • Great for self-directed IRA

 

2. Merchant Cash Advance

This is another private lending opportunity. With this one you are lending money to a company that is in the merchant cash advance market. After the financial reforms put in place after the last recession, the banking industry has basically walked away from the merchant lending space.

 

A merchant cash advance is not a loan and is not subject to usury laws. A cash advance is a stake in the future earnings of the company taking the advance. All of the big banks that left the merchant lending space are now participating in the merchant cash advance space. The industry leaders, like CAN Capital and OnDeck, are owned by the big banks! This private lending opportunity is an opportunity to participate in the high returns of this market.

 

The lender’s interest is secured by the entire book of business. Just as with the first position commercial mortgages, there is collateral securing the loan.

 

With this opportunity the lender gets a 9-month memorandum of indebtedness with a variable interest rate. When the company advances a dollar, the typical receivable is $1.35 over 4-8 months. The company keeps $0.13 of every dollar collected as its management fee and returns the rest to the lender. The default rate is stable at 6%. Since collections occur daily, funds can be re-deployed in new advances every day (daily compounding!). Historical returns to lenders have exceeded 17%.

 

Benefits Include:

  • Very attractive, secured yields with a 9-month note term.
  • No fees or commissions. 100% of your money goes to work.
  • Lender’s interest secured by entire book of business.
  • Low $25,000 minimum
  • Great for self-directed IRA

 

3. Structured Assets

A Structured Asset allows the purchaser to convert a lump sum of cash into a 5 or 10 year stream of stable, predictable, monthly payments paying 6-8% interest. It’s an annuity that is backed by secured pension income streams.

 

With this product, the buyer is matched up with a seller. The seller is someone with secure pension income that is willing to trade their stream of income for a lump sum paid in advance. It would take much more room than I have here to explain how the risk to the buyer is mitigated. But suffice it to say, this is an extremely low-risk asset. It comes with a performance guarantee that if the cash flow is interrupted for ANY reason, either the income will be replaced or a new structured asset will be swapped for the defaulted asset. This is easy to manage because default rates are stable and can be managed with a reserve account.

 

I really love this product. The returns on traditional annuity products are terrible. This product allows for some very cool financial strategies. Let’s say you have $50,000 of cash and you want to buy a $50,000 car. Well, you could trade that $50,000 for the car. Or, you could purchase a structured asset that pays $985 per month for 60 months. If you financed the purchase of the car at 4%, your payments would be $897. See the advantage?

 

Benefits Include:

  • Attractive, effective rate of return of 7-8% paid monthly over 5 to 10 Years.
  • No fees or commissions. 100% of your money goes to work.
  • Income secured by UCC-1 Lien
  • Perfect for Self-directed IRAs or retirement income planning.
  • Low $35,000 minimum

 

No one should have to suffer through the volatility of Wall Street just to accept mediocre returns on your hard-earned savings. These are the products that Wall Street doesn’t want you to know about. There’s a world of alternative ways to put your money to work and earn higher risk-adjusted returns. Choices aren’t limited to just these three options. Seek out a qualified adviser to learn more about these and other options.

 

For a great explanation of the risk factors and why I believe these financial alternatives are safer than Wall Street, please take a look at this explanation of “debt” risk versus “equity” risk:

 

http://innovativeretirementstrategies.com/financial-alternatives

 

Disclaimer: This article is intended to be educational in nature and to make readers aware of alternatives that exist outside of mainstream channels. This is not intended as a solicitation for business. The reader is encouraged to speak to a qualified advisor to learn more before making a buying or lending decision.

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