Bruce Madoff, President and founder of a New York firm that invested money for hedge funds and wealthy individuals and institutions, has been charged with operating a long-running Ponzi scheme that could cost investors billions of dollars. If this turns out to be true, it could be almost as large as the Enron scandal and will jeopardize the financial well-being of many individuals and institutions.

Ponzi schemes such as the one Madoff perpetrated are named after a 1920’s fraudster named Charles Ponzi. It is a “rob Peter to pay Paul” scheme whereby unsuspecting investors are sucked in by a fraudster making promises of unbelievable interest rate returns. Meanwhile he is just using that new money to payoff earlier investors. Once no new recruits can be found, the house of cards collapses, much like Madoff’s did when he could not meet $7 Billion of payouts to his investors.

In reading about this fraud, several very important lessons stand out:
Even rich people get duped. Lot’s of very wealthy people and institutions are going to take a bath on this one, so don’t be naïve to think that just because you have money you are smart enough to not be a victim; If it’s too good to be true… Yeah, I know it’s cliché, but if this doesn’t prove it I don’t know what does; Understand what you’re investing in. I’ve read dozens of books, free reports and emails on stocks, puts, calls, options, credit default swaps, CDO’s, etc.. Why does it always seem like these are just games of musical chairs in which the average American always get caught without a seat? Don’t go in “naked.” This is a term used in the equities market for people that invest in stocks without putting stop orders in place to protect against losses. If you’re going to invest in something, make sure you’re principal is secure and you can control your losses. The SEC can’t protect you. Will someone please explain how there could be no oversight of $17 Billion of asset holdings at a stock trading office? Will anyone get fired over this or will this be excused because of “poorly drafted regulations” and “understaffing?”

Bottom line to this outrage? If you don’t take control of or understand your investments, you risk losing your shirt to a guy like Madoff. Given the current state of affairs on Wall Street, it may be time to consider a different type of secure, high yielding investment – hard money / private mortgage loans.

A hard money loan is simply a private loan given to a property owner at a pre-determined interest rate (12%%2B). The lender’s money is protected not just by a promissory note, but also by a “mortgage” on the property, usually at a very conservative “loan-to-value.”
There are many benefits to hard money lending over equity investing:
Safety - Your money is secured by a mortgage lien that is never more than 65% of the “quick-sale” value of the property. This leaves a lot of equity in the property as a safety cushion in the event of default by the borrower (remember, don’t go in naked); Completely Hands-Off – No need to check your portfolio or trade stocks every day. Once you write a mortgage loan, you simply sit back collect a check every month at a pre-determined interest rate; Easy to Understand – You don’t need a PhD from the Wharton School of Business to understand this investment model. Example: property owner has building worth 200K and needs a loan. You write a loan for 100K to the owner. You are protected by 100K of equity. It’s that simple; Predictable – You won’t have to gulp down antacids every day watching your stocks fluctuate wildly up and down like a carnival ride. Your returns are determined in advance at the time the loan is written; Proven – This type of investing has been around longer than Wall Street, longer than the United States – even longer than paper currency!

So what is the trick to being a successful hard money lender? i) Getting access to good private mortgage deals; ii) properly underwriting them; and iii) having a professional team of legal and mortgage experts to help you close them legally and profitably.

If you don’t want your money to fall into a $50 Billion black hole, consider hard money / private mortgage loans to supplement or replace your current portfolio. If you need help identifying and closing on these types of deals, or would like to inquire further about these types of investments, feel free to contact me. Our hard money company specializes in private mortgage note investing and provides a full spectrum of services related to private/hard money transactions including loan placement; underwriting, title and closing, and loan document production and servicing.

By: Jeffrey Shiller