I have an offer to invest 35% of my portfolio (all cash and all ETFs) in a business returning 20% per year for a fixed term.
The investment amount will be secured by the value of the owner’s real estate.
My thoughts:
What are your thoughts?
3x the return of stocks? Seems to be veeery risky.
It is risky. I wouldn’t touch it if it was not secured with the real estate. I am considering it only because I can’t find a worse scenario than getting an unwanted real estate and having trouble selling it.
Smells a bit Ponzi-ish, why fixed term? Why a % value stated upfront - is it the % of your injection in terms of the business’s value?
Dunno the law here, or what kind of company it is, but I’d look into whether you could get any of the owner’s liabilities in case things go south.
I’ve had some offers of buying a stake in a couple of friends’ startups, could win big time, could fail big time too (more likely, and then you lose friends too).
Are you sure that is the case? Are you really going to give a mortgage with proper first rank collateral registered in the official real estate registry? And is this a prime real estate location you could actually sell in a reasonable timeframe?
Or are you just giving a private loan with a soft and effectively useless subordinated collateral, on a property where the owner likely might not be able to get more funding from a bank?
Yes, I am just giving a private loan with a fixed % and with the owners private property as a collateral in case he is not able to pay back in the agreed time.
Can you elaborate more on why such collateral is useless?
My assumption was that if he is not able to pay back I become an (co)owner of his property and can sell it. I guess it is not as easy and reliable?
Good point. Need to make sure that owner of the company can be responsible for company’s debts.
Is the real estate in Switzerland ? abroad ? which country ?
How is the debt structured ? receiving interest and capital over time ? Are capital and interest only paid at maturity ?
If the house is a real collateral, he could use it and get a higher mortage at the bank for 10% of the costs… huge red flag IMO. If there is already a maxed out mortage, its not a real collateral, its a gamble.
I would walk away asap and not waste any more time with that or that person.
There are so many, many reasons why this is not sufficient and can and likely will go wrong. Just ask yourself for example: How do you know that there aren’t five other individuals with similar loans who believe they have that property as collateral?
I strongly suggest you insist on a proper mortgage lending with registration. Offer to cover the cost of the notary and watch the reaction of your guy and if he is still interested in your money. This sounds wrong on too many levels.
If there was a proper Schuldbrief in a top rank for a real estate which can be sold in few months in fact it wouldnt be that risky.
And that would be one of the red flags. 20% return and no risk seems unusual. How did you get this offer? Familiy, friend or unkonwn Person?
There will be a mortgage for the real estate backed by a Notary, so, at least in theory, I should be the first one to claim debts from this real estate if necessary.
This offer is from a “business friend”. We have done several similar deals in the past.
It is in EU.
Capital and interest are only paid at maturity.
I would run away from such investment
From personal experience: bankruptcy can take several years (read: 5+), and litigation, to make the collateral available to the creditors.
Let’s say there are multiple creditors on his estate, it is not guaranteed that the first in line will get the full collateral, depending on the value of the same - judge may decide to go for auction of all assets, in which case the value drops significantly for all parties.
If you proceed, do make 100% sure you have a first right on that property, certified by a public notary using the country’s registers.
And keep in mind that in most (if not all) countries tax authorities get priority over any debtor first in line, e.g. on social premiums or income taxes over previous years yet to be paid.
But for 20% per year on a fully secured loan, that’s a risk OK to take.
Why is he willing to pay 20% if the deal is so safe?
Why is there no bank financing this? 20% would be really interesting for them as well.
I had several friends already with such a setup. I always ask them this bank question. Then they still always go into the risky bet, because good interest makes people blind. Since several years they are still not finding their money. Neither the good friend who asked their support…