Switch to Fixed Income

[FIRE'd@51]

How did it go POOF?
The loan is used to allow restaurant owners to not tie up capital while waiting for a liquor license. California requires proof of capital (in this case, in an escrow account). If the license isn't approved, nothing happens. If it is approved, the restaurant owner pays for the license (to the state) and the borrowing fee, so in either case the money in escrow in always in the lenders name, the "borrower" never actually has access to it.

So your recourse would be Chicago Title. It appears that you are loaning them money to create an escrow account for the restaurant owner to satisfy the state of California's liquor license requirement. The title company is borrowing the money from you (and others) and charging the restaurant owner(s) a fee (greater than the interest they are paying you) for setting up this escrow account. It seems the risk here is that clients of Chicago Title don't get the license and don't pay the fee leaving the title company with insufficient cash flow to pay interest to all of their lenders, ultimately forcing the title company into bankruptcy. I would want to find out everything I could about Chicago Title. If it's a highly levered entity (which I suspect it is), I can see how it could go "POOF".

 

[tacman1123]

Chicago Title simple holds the escrow account, there's an intermediary company that does the actual loan management.



And yes, if the licenses don't get approved in a timely manner (or California changes its laws, etc.) then there is risk that the promise interest wouldn't get paid. But the money in the escrow account shouldn't be at risk, absent outright fraud.



Chicago Title is huge and not exposed, they simply hold the money and send/receive wire transfers and provide the proof that the funds exist to comply with the liquor license application.

 

[pb4uski]

What is the interest rate? How much is each held in escrow for each license?

 

[Rickt]

I know it sounds crazy, even as I type this I know it sounds bad. But I feel like someone sitting at a poker table, big stack of chips in front of me, enough to quit the game and thinking that the only way to lose is to continue to play.

Still working this out in my head (and gut), thanks for any wise words.

Tac

Sounds like you are wanting to gamble with your future to me.

I would suggest move your fixed income portion to a stable bond fund (VBTLX) or Vanguard Intermediate Bond Fund (VBILX) and maintain a healthy equity balance for growth thru your retirement. Please figure out an asset allocation that lets you sleep at night and provide the growth you need.

It may be advisable to let Investment advisory service of any major firm Vanguard, Fidelity or Schwab manage your portfolio so as to prevent yourself from self-sabotaging your financial future.

Best Wishes,
Rick

 

[Al18]

I checked Fidelity new issue CD's yesterday and you can build a 3 year CD ladder that's 100% FDIC insured (assuming you stay under the 250K/bank limit), call protected from highly rated banks that pays about 2.4% interest. You can set this up in about 5 minutes. This sounds much better than your loan idea.

 

[Rickt]

Chicago Title simple holds the escrow account, there's an intermediary company that does the actual loan management.



And yes, if the licenses don't get approved in a timely manner (or California changes its laws, etc.) then there is risk that the promise interest wouldn't get paid. But the money in the escrow account shouldn't be at risk, absent outright fraud.



Chicago Title is huge and not exposed, they simply hold the money and send/receive wire transfers and provide the proof that the funds exist to comply with the liquor license application.

I had to have money escrowed like this for States Sales Tax (estimated 3 months in escrow) for a period of two or three years I think when we bought our first business. The Electric utility company also wanted either a bond or money in escrow. We did get the money back after the term ended.

In your case you are lending money to an unknown business/entity who has no capital and/or no track record. If they default on paying their tax bills you will lose the money in escrow...………..I wouldn't do it!

Good Luck to you,
Rick

 

[copyright1997reloaded]

This thread is ironic. The OP thinks the stock market is too risky, so they find an investment which they think is unique and has a return that isn't seen in normal market fixed income investments...and then comes to the conclusion (some how) that it has less risk.

OK...seems to me that there are people out there susceptible to sure-thing deals in the end don't work out so well.

 

[Huston55]

OK...seems to me that there are people out there susceptible to sure-thing deals in the end don't work out so well.

Buyers & [-]suckers[/-] sellers...it’s what makes the market go round right!?

 

[calmloki]

How did it go POOF?



The loan is used to allow restaurant owners to not tie up capital while waiting for a liquor license. California requires proof of capital (in this case, in an escrow account). If the license isn't approved, nothing happens. If it is approved, the restaurant owner pays for the license (to the state) and the borrowing fee, so in either case the money in escrow in always in the lenders name, the "borrower" never actually has access to it.


Thanks, everyone, for your comments and questions.

Our money evaporated when I failed to get adequate security on the funds we put at risk. I was lazy and thought a company that made hard money loans could evaluate and service those loans and I could be totally hands off and just collect a fixed rate while the company made loans and handled all the pesky details. Lost a nice healthy year's worth of living expenses when the company closed up shop. Could have spent money on a lawyer and sued people, but as an old landlord I figure it is best to just move on and skip squeezing turnips.

Chicago Title is a big outfit and I would trust them, but don't think they would have any responsibility other than to serve as an escrow company - if there was valid legal claim by the state of California then Chicago Title would disburse funds to them. Looks to me like Rickt has the most on point experience regarding risk on that particular investment - You need to know the circumstances in which YOUR money can be attached and by whom.

 

[marko]

This thread is ironic. The OP thinks the stock market is too risky, so they find an investment which they think is unique and has a return that isn't seen in normal market fixed income investments....

+1 What I was thinking as well.

If anything, the crash of '08 taught me the benefits of hanging in there, planning long term and maybe lining up some dividend payers to carry me through a dip. Bad days ahead? Sure, but in my mind '08 was a blessing for those who white knuckled it through.

"More money has been lost trying to time a correction than was lost in the correction itself" Peter Lynch

 

[Huston55]

+1 What I was thinking as well.

If anything, the crash of '08 taught me the benefits of hanging in there, planning long term and maybe lining up some dividend payers to carry me through a dip. Bad days ahead? Sure, but in my mind '08 was a blessing for those who white knuckled it through.

"More money has been lost trying to time a correction than was lost in the correction itself" Peter Lynch

I’m right there with you; we had pretty much the same experience. But, I have to admit that I feel more vulnerable now, since we FIREd in 2014 and don’t have the luxury of a paycheck to fall back on now.

Here’s how we try to address the ‘lack of a paycheck’ vulnerability:
- The numbers work in every calculator and we’re 60/30-35/5-10 so, not super overweighted in equities.
- We’re currently on the high side of the cash range
- We currently have some small pensions & SS coming in 0-7.5 yrs (our choice)
- Our current WD rate is <3% (even though calculators say it can be much higher)
- We have a Plan B & Plan C budget if we need them.

I’d like to hear how others plan to handle the “White Knuckle Times” that are coming.

ETA: Maybe this should be a separate thread. If the Mods agree, feel free to start with Marko’s Post & create one.

 

[njhowie]

I’d like to hear how others plan to handle the “White Knuckle Times” that are coming.

We're staying away from equities.

We're 98% in short to medium term CDs, treasuries, and munis...that leaves 2% for equities.

Having been a beneficiary of the past 10 years of market gains, I have absolutely no difficulty exiting the market for 2 years, 3 years, 5 years - whatever. If I am not comfortable with the risks, then I have absolutely no regrets or remorse not being more invested in equities. If the markets go significantly higher and we miss out as a result, that's fine. We're in a good position and having been through past white knuckle times, we have no desire to play games at this time in our lives. Being conservative, or over conservative works for us as we'll manage just fine no matter what happens going forward. Capital preservation is our investment objective and we have a low risk tolerance at this time. Spouse is of the same mindset, completely understands where we are financially, and agrees with our approach.

Our bottom line may not go up as quickly as the market, but we're guaranteed that it won't go down. That makes for stress free living.

 

[jazz4cash]

It seems fishy to me. The name Chicago Title is reassuring but they are just holding the funds and maybe writing checks. I don't think the name of the actual investment company was mentioned. Maybe I am too skeptical but seems like the true entity is using Chicago Title to boost credibility. It's a red flag that no one in this knowledgeable group seems to be familiar with this opportunity. It also seems to circumvent the state's escrow requirement (not saying it's wrong to exploit a loophole) which would concern me.

 

[Dtail]

I’m right there with you; we had pretty much the same experience. But, I have to admit that I feel more vulnerable now, since we FIREd in 2014 and don’t have the luxury of a paycheck to fall back on now.

Here’s how we try to address the ‘lack of a paycheck’ vulnerability:
- The numbers work in every calculator and we’re 60/30-35/5-10 so, not super overweighted in equities.
- We’re currently on the high side of the cash range
- We currently have some small pensions & SS coming in 0-7.5 yrs (our choice)
- Our current WD rate is <3% (even though calculators say it can be much higher)
- We have a Plan B & Plan C budget if we need them.

I’d like to hear how others plan to handle the “White Knuckle Times” that are coming.

ETA: Maybe this should be a separate thread. If the Mods agree, feel free to start with Marko’s Post & create one.

I did survive 2008 without any changes, but wasn't "into it" enough to know the difference. lol
We are partially dependent on the markets, but feel we could survive another 2008 situation, but could have issues with a 1989 to current Japan environment.
Plan B - cut down on some discretionary expenses and keep WR under 3%.
Plan C - give serious thoughts to a move to Lake Chapala, Mexico.

 

[copyright1997reloaded]

Our bottom line may not go up as quickly as the market, but we're guaranteed that it won't go down. That makes for stress free living.

In nominal terms, yes. In real terms, you aren't guaranteed of that at all.

I've stated this before: If I could "guarantee" my net worth today in real terms with some risk free investment, I would jump on it in a nano-second.

 

[njhowie]

In nominal terms, yes. In real terms, you aren't guaranteed of that at all.

I've stated this before: If I could "guarantee" my net worth today in real terms with some risk free investment, I would jump on it in a nano-second.

We'll do just fine in real terms.

 

[copyright1997reloaded]

We'll do just fine in real terms.

Maybe. Probably. Guaranteed? No way.

Here's a chart of CD rates adjusted for inflation: http://3.bp.blogspot.com/-3dP1aZcWpKM/Tidgdr5dLfI/AAAAAAAAA_E/tEBzx0XO77k/s1600/cd-history-real.jpg

The story is worse than the chart portrays, because interest on CD's is taxable. If you are in a 20% overall tax category, then a 4% CD is really yielding 3% after taxes. If inflation is running 4%, then you are losing 1% annually (compounded).

 

[marko]

I’m right there with you; we had pretty much the same experience. But, I have to admit that I feel more vulnerable now, since we FIREd in 2014 and don’t have the luxury of a paycheck to fall back on now.

I’d like to hear how others plan to handle the “White Knuckle Times” that are coming.

ETA: Maybe this should be a separate thread. If the Mods agree, feel free to start with Marko’s Post & create one.

My view: The white knuckle times are short in duration. The last quarter of '08 was hell but by March '09 we were seeing daylight. IMO, "almost the worst" happened but in the end it wasn't the end. Predictions of 'several years' never materialized and here we are now.

At the end of the day (God, I hate that expression!) I think most of us are in the market for income to cover our expenses. With that, it doesn't matter as much to me if my NW is up or down but how much income I can extract from it.

If you have X years socked away in cash or near cash to cover a dry spell, I think that's all you need to weather a lengthy downturn. Personally I rely on dividends which tend to stay fairly steady and I've set aside a healthy reserve of dividends over the years. If you have to sell equities for your expenses, you don't want to do that in a downturn and cash makes a nice bridge.

I'm at 55/40/5 and plan on staying the course.

 

[njhowie]

tacman - what is the interest rate we are talking about here?

 

[daylatedollarshort]

In nominal terms, yes. In real terms, you aren't guaranteed of that at all.

I've stated this before: If I could "guarantee" my net worth today in real terms with some risk free investment, I would jump on it in a nano-second.

Have you looked at TIPS ladders? Or matching strategies in general?

My retirement plan tries to avoid anything involving white knuckling outside of the occasional roller coaster or white water raft trip.

 

[copyright1997reloaded]

Have you looked at TIPS ladders? Or matching strategies in general?

My retirement plan tries to avoid anything involving white knuckling outside of the occasional roller coaster or white water raft trip.

Yes, and I have about 9% of my total assets in TIPs and other inflation adjusted holding (e.g. Savings Bonds). Was a little higher before the ISM (Sallie-Mae inflation-linked bonds) got called.

I just wished I put a lot, lot, lot more money in TIPS back when they were yielding close to 4% real.

Even with that, there are still risks associated with TIPS. Namely single country risk, and risk that the inflation hedge for them doesn't match my personal inflation.

But thanks for the suggestions, I would be interested in matching strategies that people come up with (beyond the obvious TIPS and when to take social security).

 

[ESRwannabe]

To the OP.

You might want to consider "outsourcing" some of the decision making to Vanguard... For many years I have had 100% of my Roth IRA in the Vanguard Managed Payout fund (VPGDX). I have now also added it to my taxable account, as it is actually pretty tax efficient.

I've criticized this fund before, but take that with a grain of salt, as I have and continue to own a lot of shares in it.

Anyway, I am happy to outsource some of the decision making to someone else and that's what I find useful with this fund. VPGDX is a balanced fund that tries to pay out 4% per year in monthly increments, while offsetting inflation and maintaining the principal. Despite the fund launching at possibly one of the worst times ever, it has accomplished its mandate. So, I don't see why that wouldn't continue into the future.

VPGDX is kind of neat in that it invests in a lot of stuff I have no clue about like "alternative strategies" and commodities. This is a modern portfolio theory based approach where they try to minimize volatility and maximize the return by tossing in a bunch of asset classes that behave differently from each other. Also some factor based tilting to low volatility and value.

Anyway, IMHO its a good idea to hedge your bets by letting other people make some of the decisions. Another popular choice around here is the Vanguard Wellessley Income fund (there is a global version available now as well).

Here is a link to VPGDX if you are interested:

https://investor.vanguard.com/mutual-funds/profile/VPGDX#tab=0

 

[daylatedollarshort]

But thanks for the suggestions, I would be interested in matching strategies that people come up with (beyond the obvious TIPS and when to take social security).

The best info I've found are posts on Bogleheads by a poster named Bobcat2, plus the info in their wiki. One of our strategies was to have a fixed rate mortgage offset with non-COLA pension income. A couple of our pensions will not go up with inflation but then neither will the mortgage. When the mortgage is paid off the future value of the non-COLA pension income may be reduced by inflation but it will still be extra disposable income to us since we will no longer have a mortgage payment. In California we also have Prop 13, which limits our property tax increase each year.

If we can get even a zero real return, our maximum safe withdrawal rate should be 3.33% (100 / 30 years = 3.33%). Five year TIPS are paying more than zero these days. They are at .7% as of this writing, so 3.33% or even higher maximum SWR is looking pretty doable between our TIPS portfolio and other investments.

 

[FIRE'd@51]

Was a little higher before the ISM (Sallie-Mae inflation-linked bonds) got called.

Not to nitpick, but ISM matured in January of this year. It was not called.

 

[copyright1997reloaded]

Not to nitpick, but ISM matured in January of this year. It was not called.

Thanks. January was so long ago.

[Note to self: You have too many individual holdings.]