Advantages of Privately Structured Deals
A key concept that the book goes into detail on is that with mass market investment opportunities/Wall Street securities, risk and reward are always linked. You could choose low risk and receive low returns or choose high risk and the potential for high returns. Yet with the private deals we advocate in private mortgage investing or cash flow real estate, it is possible to structure investments for significant returns but very limited risks. Consider the following advantages:
|Traditional Securities||Cash Flow Real Estate, Loans|
|Type of market||Efficient Market—capital will always align risk and reward||Inefficient Market—can privately structure for higher reward/lower risk|
|Asset valuations||All assets similar, priced by mass market with lots of buyers/sellers||All assets are different, priced individually, often only one strong interest buyer in a strong negotiating position|
|Control||Only control when to buy/sell||Able to control the value of the asset as well as the profits the asset generates|
|Liquidity||Sold in moments, millions traded per day||Sold individually, takes time to appraise, negotiate price, settle transactions|
|Discounted?||Never purchased at discount, auctions determine momentary price||Frequently purchased at significant discounts from motivated seller, generate significant equity on the buy|
|Local knowledge||Irrelevant, playing against institutional professionals with more knowledge than you can ever acquire||Essential, able to discern efficient opportunities to solve asset problems and create significant equity on the buy|
|Leverage||Rarely purchased with leverage||Frequently purchased with leverage which can safely multiply returns|
|Price volatility||Highly volatile daily price swings and longer term market cycles, Federal Reserve intervention creates bubble markets||Longer term price stability and less volatile market cycles…tend to not be correlated with security market cycles|
|Inflation hedge||Not applicable||Cash Flow Real Estate is a great hedge against inflation or a deflating currency|
|Strategy||Primarily purchased for possible appreciation/capital gains||Primarily purchased for aggressive cash flow, may achieve appreciation as serendipity|
It is knowledge and control that allow you to reduce risks and magnify returns. With privately structured deals you are able to know more about the facts of how profits can be made, the unique characteristics of specific deals and also develop plans to reduce risks.
When you partner with experienced professionals in privately structured deals, it is not uncommon to achieve 2X, 3X, even 5X returns with limited risk. We consider these accelerated returns Harder Working Money.