Cash on Cash Returns for WAC Investors

Individual investors continue to seek alternative investments to enhance their overall returns as part of their investment strategy. The typical “pie chart” in the average high net worth investor’s portfolio consists of marketable securities including blue chip stocks and highly rated bonds including treasuries bills. For liquidity and short term working capital purposes, investors keep ready cash in the form of bank deposits that include money market accounts and short term CD’s for the purpose of paying their monthly living expenses and to create short term yield.

Another significant portion of an individual’s pie chart that is critical to the growth of the investor’s portfolio is real estate. Both owner occupied (including a personal residence) as well as passive real estate investment holdings.

As the private lending space continues to grow, individual investors are increasing their allocation into private loans and are pouring money into funds that manage pools of private loans as well as individual private loans that are managed by smaller private lenders.

In the current interest rate environment and existing market conditions, smaller private loans are being priced in the 12% to 13% (coupon) range along with multiple points charged to the borrower by the lender at closing. In addition, some of the more savvy private lenders are prepaying the interest on their loans upfront for three months to one year. For instance, on a $1,000,000 loan that is priced at 12% with six months of upfront prepaid non-refundable interest at the loan closing, the private investor that funded that loan receives $60,000 in cash at the loan closing. Thus, instead of earning a 12% fixed ROI on this particular loan, the investor is actually earning a “cash on cash” ROI of approximately 18% to 20% as a result of having the ability to immediately reinvest the $60,000 in prepaid interest into another investment vehicle.

As part of this aforementioned transaction, the investor can reinvest the $60,000 in prepaid interest by purchasing a short term T-bill at approximately 5% with no risk. If this particular investor has a larger “appetite” for risk, then they can reinvest the $60,000 in prepaid interest into another smaller private loan that will yield the investor much higher returns in the 12% range or greater. In addition, the typical short term private loan has a maturity of one year or less that enables the private investor to monetize their private loan investment very quickly so that they can reinvest that same money into a similar investment.

As part of this business model, private individual investors that are allocating a portion of their pie chart into short term private loans are taking advantage of the “Velocity of Money” theory, These investors are earning between 12% to 20% (in some cases higher) in annual ROI’s and they are able to turn their money over very quickly with tremendous liquidity advantages. Investing in the private loan space is also enhancing the growth of that investor’s “nest egg”. On the flip side, although investing in real estate can be very lucrative, real estate investing typically ties up an investor’s capital for the longer term and creates liquidity challenges for the investor.

If you are seeking financing for a real estate investment or for short term working capital and/or debt restructuring for your business, Worth Avenue Capital has opportunistic capital for growth. We are looking to originate new loans from the Northeast to Florida from $250,000 to $5 million. If you are seeking an established private lender to support your goals then please contact me at worthavenuecapital@gmail.com and/or (203) 605-4082.