Have you ever walked into a meeting or into a room, knowing for sure that what you were going to say would make everyone in the room think you were a complete idiot?  ….. AND you knew you were right, but somehow had to convince everybody else?

That was exactly the situation I faced when we met with a major development group with which we are trying to form a long-term relationship.  Imagine the scene…..  a board room filled with developers who are used to one specific function…. maximizing returns in their own high yield investments.   Their interest in partnering with GetPreConStructionDeals.com is of course to form a program where they can create lots of investor sales;  now they wanted to hear how we proposed to do that and create some investments with high yield for the investor as well.

Now the bombshell drops when Chris says……..

What we want to create is a High Yield Investment Program that yields approximately 70% Cash-On-Cash returns, per year, with NO APPRECIATION.

You might as well yell FIRE from the top of a 50 story building.  Why?  Because they truly thought these were completely unrealistic yields for any type of investment.  Fortunately, we were able to show the developers why these returns make perfect sense not only for the investors but for the developers as well.

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So What Is Realistic?

The longer that I stay in this business and work with both very experienced and novice investors alike, one of the things that I realize is that there is a major disadvantage for new investors: they simply don’t know what is occurring in the high yield investing world and therefore have no idea of what is realistic and what is hype.

Suppose, for example, that we promoted a real estate investment opportunity on our web site that we thought would make 70% returns, per year, on cash invested.  What is your first reaction to that statement?   Think hard before you look below…..

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Your first reaction should be yeah right, tell me another one!  Why would an experienced investor come to that conclusion for this high yield investment? 

1.      Historical market returns (non-real estate) have been about 10-12% over long time periods;

2.      Except for a few notable exceptions, real estate markets have done less than this amount;

3.      Very good private placements right now are offering about 20-25%, but contain substantial risk: the high yield investment is structured to reward that risk;

4.      If we could offer 70% returns with no strings, no debt, moderate risk, etc., then billion dollar institutional funds would consume all available… so why are they offering this to the private investor?

Out of these 4 items, you should really try to understand item 4).  What many people don’t realize is that in the capital markets, there is a lot of money available from high net worth individuals, from investment groups, and also from major institutional players…..  All have the same objective:  turn their capital into high yield investments.  So the next time you see a deal that is too good to believe, then step back and ask why aren’t all these others players involved?

So, you may be wondering then is that 70% I mentioned above fiction?  NO!!  But let’s look at how it occurs.  In real estate, we have something called leverage.  That means that it may be possible to finance a large % of a purchase while only using a small % of your own cash.  So, for example, you buy a $200,000 home with 10% down ($20,000) and then suppose you can sell it for $250,000 in 2 years….  This equates to over 100% cash-on-cash gain…. At least on paper.  In my world, that is definitely a high yield investment.

Of course, the above over simplifies things because we did not account for expenses entering, holding, or selling the property.  In our Mastermind Group for example, we use a threshold of 40% cash-on-cash return hurdles over the life of the property hold using realistic expectations for rents, appreciation, holding costs, etc.

How Do You Juice Up Your Returns?

Two words for you….. Risk & Leverage.

Right now, you can get reasonably risk-free rates of return of 5% or so.  If these returns are not acceptable to you, then you are going to have to look at taking on more risk.  To obtain returns in the general stock market, yes, you can HISTORICALLY get 10-12% over a long period but at what risk?  That is for you to decide.

Now, suppose that you are a high net worth investor that can participate in private placements to really try an create a high yield investment for your self.  Life is good because now you can 20-25% returns on your money….. if the investment works.  If it does not, then you may easily lose all of your original investment.  There is a reason that the SEC requires investors in these projects to be accredited because supposedly, these individuals have been around the block enough to properly assess risk and reward. 

The last approach is then with leverage and what is called as OPM (other people’s money).   For many of our readers, the other person is the mortgage company that holds the note on your investment property.    Via financing and leverage, it is quite possible to produce 40%, 80%, 100%+ returns.   Of course, with leverage comes the other side….. enhanced risk.   For savvy investors, they do everything possible to minimize risk followed by making sure that they can handle any possible downside.  

The Spectrum Of Investors

With the background above, let me ask you where are you located on the spectrum of investors?  In all of our travels and conversations, we see 5 basic types:

Conservative – This is an investor that simply wants to invest in safe instruments like CD’s and at most risk, investments like mutual funds and Exchange Traded Funds.

Gun Slingers – Typically have limited net worth and are looking for that one score to really “launch” their investing.  Frequently, these individuals do not understand the risk they are taking.  Typically have < $10,000 to invest.  Unfortunately, these people are typically the target audience at many real estate investor shows, boot camps, etc.

Growth Oriented – Unless you were born with silver spoon in mouth, almost every successful investor has to cross this stage…. Frequently these investors have decent net worth but are stuck.  They have other assets (like 401K’s, IRA’s, etc.) that they are investing conservatively.  On the other hand, they frequently have some liquid capital that they would like to really try to get some great returns on.   They are willing to take on above average risk and use leverage if it makes sense.  Typically they have $10,000 to $100,000 in available capital to invest.

High Yield But Safe – At some point, the Growth Oriented investor realizes they have accumulated some substantial investment capital.  They then wrestle with how to invest all of that capital (typically $100,000 to $500,000) at this point without taking on too much extra debt (leverage) and exposing their whole portfolio to disaster.  Frequently investors in this stage look at avenues from commercial real estate to private placements.

Diversified, High Yield, Zero Debt – Once the investor really makes it big, then they are looking for how to have their money completely work for them but without extreme risk and debt.  Frequently, they participate as capital partners for developers and projects but work hard at structuring solid, but yet safe returns.  

Most people have no idea where they stand on this spectrum.  So, when I almost got tossed out of that meeting I described above, I was speaking to individuals that we used to dealing with investors in either the high yield but safe category or the High Yield, Zero Debt group….. In either case, they knew that 20-25% returns are reasonable…. Certainly not 70%.  On the other hand, what we showed them how to do was to smartly create leverage for the individual investors, in which case 70% is a perfectly reasonable, and a very attractive, target.

Your Help Is Needed

With over 24,000 subscribers to our web site, we think it would be fascinating for all of us to know the type of investors that occupy our community.  If you will complete the simple selection below, we will publish the results in a follow up newsletter.  Thanks for your help.