Cost of Carrying

by Mike Kaleikini

We get to see proposals for lending all the time. Gurus teach newbies how to “set up” a great deal on paper so that it looks tasty enough to investors that will make them want to write a check. Interestingly enough when they come across us who are brokers, and we look at the numbers, we notice one common thread. They don’t really account for the cost of carrying the loan. They think it all falls under “Closing costs and fees”. Unfortunately, although the intent is good the math is usually off.

We just had a situation where a young investor was ready to take on the world by buying a property that was worth about 40K. He wanted to do an “addition” by creating 2 more bedrooms in the basement and believed that it would increase the value of the property by almost 100%. Good idea if the bedrooms were actually an addition to the existing structure. That was not the case here.

In fact, where this property resides, doing such a thing wouldn’t do anything to the value of the property. It would just be a property with two more bedrooms downstairs. Even with what he would have done to renovate, update and upgrade, it wouldn’t have affected the value enough for them to make any money. In fact, after going through the deal with the investor piece by piece and clarifying the bedroom addition issue, he realized the potential loss was over $30,000. At that point it became, “How do I get out of this deal?”

We made a few suggestions as to who he could talk to with regards to finding a viable strategy to get out of the obligation to perform. Whether he get out scot free or not, it’s better than the alternative which was to lose a lot of capital that he would have needed for the next opportunity.

Think of this, if we had lent the money our investor would have been put in a bad position, he would have lost income and capital as well. The young investor would have lost his skin and investment and left the world of investing with a bad taste in his mouth. We wouldn’t want that, so we educate as kindly and compassionately but as matter of fact as possible. We don’t lose business by doing this. In fact we gain the confidence of our active and passive investors because they know we’re watching out for everyone’s best interest.

If you haven’t inquired yet as to how to get a private money loan, or if you haven’t connected to find out how you can become a private money lender…why not?

For more information contact Mike Kaleikini @ 702-918-0953 or email him @ [email protected]