Advice for a good friend

[laurence]

Help! I have been trying to do some crash research for a friend who is in a bit of a crisis. He and his wife are 60 years old, and they have been retired for about 15 years now (my hero!). His method of making his money last has been unorthodox to say the least: mortgage lending to people with bad credit ratings. After carefully vetting the borrower (don't ask me how) he then lends them the money to start their business, buy their house etc. at around 9% and he has been making this work for some time now. Problem is, mortgage companies will lend to anybody now, and he is being undercut. So he can't make a living like this anymore. So here's the situation. His house is paid off, has approx. 1 million in the bank, and has NO understanding of equity markets, bonds, etc. because he never had to. What would be the best investment vehicle(s) for someone in his shoes, who doesn't have a large cash outflow every month (i.e. mortgage payment ). He knows he can make it work, he is just paralyzed with fear, and I being half his age have not done research into the type of investments appropriate for him. With all the great minds on this board, I know you'll have some good advice. Any help would be appreciated, thanks. (I apologize in advance if this is a redundant question!)

 

[yakers]

First thing, Don't Panic! Your friend is not in a terrible situation. With $1M in the bank and a decent street based business experience he is way ahead of countless other folks. Since he has the skill and interest in making loans maybe he should just cut his business down. There are still a lot of "fish" out there even if they may be harder to find. And with the rest, the usual balance of indexed funds would be safe and generate some income. Now if he is looking for a consistent, safe 9%, well so am I. He may have to settle for smaller returns but the trade off may be less risk and doing a lot less work.

 

[brewer12345]

Depends. How much income does he need annually? If it is $40k or less, its easy, since the standard index portfolio (75/25 stock bond) should cut it. If he isn't comfy with this or needs more income, then there will clearly be more work involved. I am under the impression that hard money lenders on RE do at least 9%. Otherwise, he might look at things like some of the MLPs (I own one that yields a growing 7% and another that yields 9+% but has no track record yet), commercial real estate (perhaps triple net lease properties?), or going back to work...

 

[laurence]

Scuse my ignorance, what's an MLP? Also, the Vanguard Wellington and Targeted Retirement Funds, are those good choices for him?

 

[brewer12345]

MLP = Master Limited Partnership. These are partnerships traded on public exchanges just like any equity. They tend to pay out quite a lot of cash and usually have tax advantages related to their payouts. The best ones consistently raise their distributions over time. I personally own Suburban Propane (SPH) and StoneMor (STON), but there are dozens of these things out there.

 

[Brat]

The first thing I would tell him is to avoid engaging an "investment counselor" or attending "investment seminars". He should study his options with as much energy and analysis as he did with individual loans. If he frequents the 'net many of us can point him to quality resources. If he like to read a book list is easy to come by.

 

[Guest]

If he doesn't need 9% to live on, then the Vanguard Target Retirement Income fund would be fine. Keep it simple.

 

[charlie]

Laurencewill,

I would be inclined to suggest that he put it all in
a short term bond fund and then DCA over a 3 year
period into Wellesley Income. Wellesley is paying
about 3.7% currently while Short Term Investment
Grade is paying 3.4%. This would give him about
$35k spendable income per year. If that is not
enough, then suggest he put enough in a MM fund
to supplement the $35k per year until SS kicks in
at age 62. Suggest that he have the distributions
from both Wellesley and Short Term Investment
Grade be invested in the MM account and then he
can draw down the MM on a monthly basis by writing
checks without creating a taxable event.

Sounds like he is in great shape to me.

Cheers,

Charlie

 

[laurence]

O.K., I have to ask him more questions, find out what will be enough and what his comfort level is. I think he is scared more by his lack of knowledge than his current balance. I already told him if someone actively seeks him out with ways to invest his money, it's probably a bad (expesive i.e. rip off seminar) investment, so he is holding tight. Thanks for these tips, I know a lot of good information has already been posted on this board, I just wanted verify and tailor the advice more closely to his specific situation. Thanks to all!

 

[cute fuzzy bunny]

Charlies advice is good, although I'd go straight into Wellesley admiral shares and leave it at that. Since Wellesley has never had 2 down years in a row, DCA'ing over 3 years might not give you a better result than just getting in.

37k a year in dividends against that $1M, plus an average of 55-65k in capital appreciation per year against historical returns (since 1970).

Without any debt, he should be able to mope along with that 37k until the banks eat all the bad loans they've given out and he can get back into his old business...

I'm still shaking my head over the HELOC that ING direct gave to my wife on her old house. Nobody even came out to look at it to see if there was a property still standing, and there was no appraisal whatsoever. Last time the property exchanged hands was 13 years ago. Granted her credit is solid...not stellar but solid...but still...

 

[Nords]

Appraisals are so 20th century.

I'm still shaking my head over the HELOC that ING direct gave to my wife on her old house.  Nobody even came out to look at it to see if there was a property still standing, and there was no appraisal whatsoever.  Last time the property exchanged hands was 13 years ago.  Granted her credit is solid...not stellar but solid...but still...

Gosh, all the information that anyone could want about any real estate is all in an online database that's 100% correct. Just ask our credit union.

We've financed/refinanced seven times over the last five years. The only appraisal was for buying the new home and only because we were putting down 10%. If we'd done 20% there wouldn't even have been that.

Then the CU leveraged our last refinance for a zero-cost HELOC.

I wonder how this would change for the next RE downturn...

 

[cute fuzzy bunny]

Yeah...the dang house could have burned down 10 years ago and we still would have gotten that HELOC...

 

[laurence]

I hear that on the refinance, we just refinanced to get a 20 year fixed so we can ER, and we got a HELOC set up to pay off a student loan and get some tax deduction until it's gone. My wife and I's credit rating is knocking on 800, and the lender practically killed themselves to get the loan! The most stress free loan in my life, came to my house to do the paperwork, too! On the flip side, my coworker's son just got laid off working in the mortgage business. Quickly found other work, but that well is about to run dry!

 

[ESRBob]

Laurence,
Curious whether you found out your friend's spending needs. I wonder if he has been spending something close to the 9% he's been making every year, or whether he is closer to spending 4% or 40k a year. I'd be curious as to whether the thought of living on a SWR of 4% is comfortable or whether he views it as hopelessly low? We on the ER Board have all got our heads wrapped around the concept of SWR whether it is 3.5% or 5% but I've always wondered how people react when they first hear that number, and whether they find it pathetically small.

 

[John Galt]

While we are waiting for Laurence.................

I am interested in the SWR concept and understand the
numbers and most of the theories. However, if we took
out 4% of our TOTAL net worth every year, it wouldn't even cover subsistance living. Maybe a "possum ER"
but nothing beyond. Thus, the SWR is mostly ignored
by us. We have what we have. If our net worth can
be maintained, or drawn down very slowly we should be fine. Anyway, if we are alive in 6 years we will both be
drawing SS checks. It looked a long way off when I retired. It looks pretty close now.

JG

 

[ESRBob]

John,
Sure- if you are that close to SS, you can just sort of net that out of your spending, and only need to cover the balance with SWR. And obviously if you don't plan on living longer than 30 more years, you can start to draw down principal, too.

Actually, for LaurenceWill's friend, the same would apply -- he can basically have his SWR plus his SS (plus any other pension) as the sum to cover annual spending. At least that is how I look at it -- anybody disagree? It seems to me that pensions should just be yours to spend right out of the gate and only use SWR to cover the balance needed, if any.

 

[haha]

I am interested in the SWR concept and understand the numbers and most of the theories.  However, if we took out 4% of our TOTAL net worth every year, it wouldn't even cover subsistance living.  Maybe a "possum ER"
but nothing beyond.  Thus, the SWR is mostly ignored
by us. JG

I guess that just goes to show what extreme intelligence, willpower, and "out-of-the-box thinking can do!

If I start having difficulty, I am just going to haul out my perpetual motion machine, which so far I have held in reserve.

Mikey