In the November Issue
- Which is better? Private Lending vs. Investing in a Fund
- Benefits of Lending on Individual Deals
- Benefits of Investing in a Fund
The #1 Question We Get At TF Management Group LLC…
A frequent problem I hear from clients is that they have the capital available for alternative investing, but they don’t know the best way to deploy it. They know their financial goals, but are unsure how to reach them.
So where should they invest in order to create wealth and generate income?
Lending on Individual Deals vs. Investing in a Fund
Two good strategies to explore are private lending and fund investing. TF Management Group LLC offers both to investors, but which is right for you? Let’s compare them…
Part 1: Advantages of Lending on Individual Deals
Private lending is simply the situation in which you, as the passive investor, provide capital for the active investor (rehabber) to acquire and rehab a property in exchange for a reasonable return. Private lending in essence allows the investor to “be the bank.”
Here are two sets of reasons why investors appreciate private lending:
1.) Strong returns, little time invested, and no tenants!
With private lending, you don’t have to deal with the ‘tenants and toilets’ issues that landlords face, and you also don’t have to get involved with permitting, managing construction crews, and selling properties on the retail market like rehabbers must do.
Private lenders typically expect a return between 8% and 15% for the short-term use of their capital, and very little of their time is required. It’s pretty hard to generate that kind of return in such a small amount of time by owning properties.
For this reason, I like to say that private lenders often have the ‘best seat at the closing table.’
2.) Flexible risk-reward ratio
In private lending, you’re a lender, not an owner. If the loan goes well, you get paid without any ownership issues. Private lending can be perfect for self-directed IRAs.
The keys to success are understanding the value of the asset that secures your loan and lending to people who are likely to repay you. When you do your homework on the property and the borrower, you can assess the risks involved in the deal and make decisions accordingly.
Manage Risk-Reward with Lien Position
- Senior liens offer lower risk and more moderate returns and are preferred by the majority of investors because they are safer (you may take back the property if the borrower defaults)
- Junior liens offer higher risk along with higher returns and are better for investors who have a greater degree of understanding of the local market and the borrower.
Private Lending Examples from our Portfolio
Example #1 – Senior Lien on a Purchase & Rehab – very low risk and solid return:
The property was purchased for $870,000 and needed a slight rehab of $30,000. The ARV (after repair value) was $1.2M, and the borrower provided a down payment of $430,000, while the lender provided $470,000.
Providing $470,000 on a property with an ARV of $1.2M is an incredibly low-risk loan because the loan-to-value was below 40%.
In this deal, the return was 9%. So from the risk-reward perspective, you have a 9% return and 40% loan to value risk. It was a slam dunk.
Example #2 – Moderate risk and higher return:
This was a loan on a commercial property that was to be converted to a self-storage facility. The borrower was an experienced operator, and the purchase price of the facility was $450,000.
The lender provided a bridge loan until the permanent financing could be obtained for the conversion to self-storage. The loan amount was $350,000 (borrower providing the other $100,000). The loan had about 80% loan to cost, but loan-to-value was much higher because the property was worth between $450,000 and $600,000. The overall loan-to-value on the loan was essentially 60-65%.
The lender will earn 12% on his money, and TF Management Group LLC earned 3 points on the origination. The risk-reward here is very healthy.
If you’re interested in participating in private lending opportunities like these, just contact us and let us know.
Part 2: Advantages of Investing in Funds
Now let’s take a look at Funds…
Fund investing has three main strengths that differ it from lending on individual deals:
- Passivity (“Hands off” investing)
The primary benefit of fund investing is that you can get a similar level of return to private lending on individual deals, but with greater diversification. The fund provides diversification in that it raises capital from multiple investors into a ‘blind pool’ and then invests that money into promissory notes and other assets.
Diversification is good because it reduces risk. Consider that in a single property investment, if the deal goes bad, it’s a potentially big problem, but in a fund that’s invested in numerous loans and assets, it’s not as much of a problem since it’s one deal among many. Despite the possible issue with a single investment, your money will still be working in other investments.
In a fund like ours, loans are constantly maturing (paying off), which cycles liquidity back into the fund. TF Management Group LLC maintains high liquidity by providing short term loans.
Passivity – Hands Off Investing
In individual deals, the investor is heavily involved in making sure they are knowledgeable of both the market and the borrower to manage their risk-reward.
When you invest in a fund, your profits are purely passive. In other words, you make an investment, and you just collect quarterly returns. You don’t need to do anything else.
When investors put their money in a fund, their money is working all the time. There are no gaps between deals and when they are repaid.
If you’re interested in investing in funds, just contact us and let us know.
What Makes the Tempo Opportunity Fund LLC Different?
The Tempo Opportunity Fund LLC was designed to offer favorable terms to investors, and in many ways it can earn a better return than individual deals, even when under a similar deal structure.
Here are some of the fund’s key features…
1. All origination points paid on lending flow back to the Fund and its investors. In many mortgage pool or hard money funds, the fund manager retains fees paid for points. TF Management Group LLC, however, does not receive these fees. We give 100% of the origination points to the fund. The fees then become part of the fund’s overall income and go through the waterfall distribution model and back to investors.
2. The fund manager’s interests are aligned with that of the investors. When we make quarterly distributions, the first money out goes to satisfy a preferred return of 7% to investors and a 2% management fee to TF Management Group LLC. Then, with the remaining distributable monies, there’s a split between the manager and the fund, and the split ranges from 60-40 to 80-20 (in favor of the investors). In other words, the fund manager only stands to do well if the distributable cash is significant.
Still wondering which type of investment is right for you? Please contact us and we’ll be happy to discuss with you the advantages of both.
Thanks for reading,
CEO, TF Management Group LLC
TF Management Group LLC (TFMG) is an investment fund management company that specializes in both short-term debt financing for real estate “fix and flip” projects, and long-term “value-add” equity deals.