0503 2012 Application Example of An Arbitrage Investment Opportunity Using the New FARJHO Home Ownership Structure

This example appears in the 2nd page of InvestorsAlly’s FARJHO marketing flyer. https://www.box.com/s/1f2e57e6f0ac5b6738f0

Application Example of An Arbitrage Investment Opportunity Using the New FARJHO Home Ownership Structure

Do you want to put your idle home equity to work so that you could earn more appreciation potential? Would you be interested in helping other less affluent residents to partially co-own homes in California?

You could use your excess home equity to co-own homes with a tenant/partial home co-owner in a new home ownership structure called FARJHO – Flexible And Reversible Joint Home Ownership. Here is a short analysis for a home of an appraised value of $2,000,000. The amount of cash out re-finance is assumed to be $1,000,000 for illustration simplicity purpose as an example.
Before                       After

Current Home Fair Market Value

$ 2,000,000           $ 2,000,000
Re-Investments in Other FARJHO Transactions

__________        $ 1,000,000
Equivalent Home Equity for Potential Appreciation

$ 2,000,000           $ 3,000,000

What about the carry, i.e. netted monthly cash flows between expense and income under the FARJHO transaction?

*         A financial arbitrage currently exists as the mortgage rates are still being artificially kept very low.
*         Between the current long term fixed rate borrowing cost (e.g. 3% – 4% for a 15-year or 30-year fixed rate mortgage) and the current market rental yield (e.g. 7% – 12%) there exists a net positive carry of 1% – 5% annually after deducting all taxes, fees and insurance cost in favor of the arbitrageurs under a typical FARJHO transaction.
*         The cost of the monthly mortgage payments will remain the same for the next 15 or 30 years but the income from monthly rental receipts will adjust every two or three years and would most likely to go even higher in the current trend.
*         The arbitrageurs who take out the cash-out re-finance now could enjoy not only the potential long-term price appreciation from much expanded home equity, they will also receive a check as additional current income every month.
*         The current low fixed mortgage rates may not last forever. A change will be coming and it would be wise to lock it in now.

The free enterprise capitalism based new home ownership structure FARJHOSM could let pure profit-driven real estate investors help other aspiring home owners partially co-own homes through the equity sharing concept without the imprudent use of any debt. FARJHOSM was created back in 2009 as a fair and equitable business method to address the free market needs of both joint property investors and aspiring home owners. Through FARJHOSM, foreclosure will no longer be a possibility going forward. It will help restore our national economic prosperity, foster the steady growth of our country’s housing industry as well as promote the on-going neighborhood stability and social harmony in local communities throughout our country!

Filed under: Equity Sharing, FARJHO, Housing, InvestorsAlly, Mortgage, Arbitrage, Equity Sharing, FARJHO, Housing finance, SAM, SEM, shared appreciation mortgage, shared equity mortgage, Shared ownership mortgage, SOM

0402 2012 The distinguishing features of FARJHO as a new business method to implement the equity sharing concept are three-fold

This text appears on the 1st page of InvestorsAlly’s FARJHO marketing flyer. https://www.box.com/s/1f2e57e6f0ac5b6738f0

Do you have trouble in obtaining a conventional mortgage to buy a home or any trouble in selling your existing home when potential buyers could not qualify for a mortgage to buy your home?

InvestorsAlly could help you buy a home using the new equity sharing method and/or help you sell your house much quicker because InvestorsAlly could help other potential buyers obtain both conventional mortgages at low mortgage rates when they have good credit, and if not, help them try the new alternative equity sharing method of FARJHO.

The distinguishing features of FARJHO as a new business method to implement the equity sharing concept are three-fold:

First, FARJHO allows renter/home occupier and joint property investors to own only one home at a time in order to maintain the sanctity and the freedom of the single family residence ownership. This is in sharp contrast to many community oriented equity sharing methods of Co-ops, Land Trusts, Kibbutz or Commune types of older equity sharing methods.

Second, as a brand new concept, FARJHO only allows member level debt financing, to eliminate the foreclosure possibility which exists with conventional property level debt financing as commonly used by a Shared Equity Mortgage (SEM), a Shared Appreciation Mortgage (SAM), a Shared Ownership Mortgage (SOM) or any other existing equity sharing schemes to date. In all those older business methods, the home occupiers could still get foreclosed whenever they lose their monthly income capability under those old property level financing arrangements.

Third, FARJHO provides a natural built-in buffer to conventional renting to avoid potential eviction when the tenants temporarily lose their monthly income capability. The equity stake of the renter/co-owner of the FARJHO structure could act as an optional voluntary collateral against missed monthly rent payments and therefore provides property investors with enhanced investment security through less credit risks and at the same time provides the tenants/co-owners with more home occupying stability during the rainy days in their working lives.

Filed under: Economic Viewpoints, FARJHO, Housing, InvestorsAlly, Mortgage, Arbitrage, Equity Sharing, FARJHO, Housing finance, SAM, SEM, shared appreciation mortgage, shared equity mortgage, Shared ownership mortgage, SOM

05/09/2011 More on the "Bernanke Arbitrage" trade – fellow rich Americans helping fellow Americans own homes as a brilliant investment opportunity for themselves

In Southern California, all around us there are many wealthy people who own multi-million dollar homes along the coastal area from Malibu, Pacific Palisades, Beverly Hills, Manhattan Beach, Newport Beach, Laguna Beach down to La Jolla in San Diego. Many of them do not even have a mortgage.

On average many decent homes in these exclusive coastal area are worth above two million dollars. Wouldn’t it be a good idea for some of them to have a cash out refinance to put their idle home equity to work. Say they could simply borrow only one million dollars (50%) from their two-million-dollar home and use that money to invest in a partial interest through a member interest in a FARJHO/LLC deal to help some other less fortunate fellow Californians to own homes? One million dollar cash could probably help finance three or four FARJHO deals in the Inland Empire area for example, where average decent homes could sell around $300,000.

This is by no means just a charity work for these rich property owners. They could potentially do very well and become much richer by doing good this way. At today’s posting, the level of a 15-year fixed rate mortgage is about 3.83%. In a FARJHO deal the current market rental rate comes up to be between 5% to 7% annually. The positive carry could range between 1% to 3% after cost.

Generically speaking, that means if a rich home owner with a $2 million home borrows a fixed rate mortgage of $1 million (50% LTV) and invests the cash as a JPI (joint property investor) to help 3 to 4 other AHOs (Aspiring Home Owners) to buy homes through the FARJHO structure, he/she could earn a minimum spread of between 1 to 3% on the one million dollars every year for the next 15 years while turning his $2 million home equity in his current property into a total equivalent of $3 million home equity for the next 15 years.

When home prices start to go up anytime within the next 15 years (say 5 or 7 years later), he/she could simply unwind the trade by selling the homes he/she invested in when agreed by the AHOs, selling only the FARJHO member interests to the AHOs or to any other third party investors in order to take profit. He/she can then use the proceeds (much higher than $1 million) to pay off the original $1 million loan (either amortized or a balloon). He/she could have the choice of using either an interest only loan or a fully amortized loan for this 15 year fixed rate mortgage, with some benefits trade-off of course.

There are also justifiable tax oriented incentives such as the home mortgage interest deduction for unlocking this primary residence home equity through a moderate leveraging for these rich people. As long as they stick to the 30- or 15-year fixed rate mortgages so that there would not be unnecessary interest rate risk in the future, it could be made a prudent investment for them. Here below are a few other advantages as compared to his/her other investment alternatives with the cash generated through refinancing.

1. The annual dividend yield from the rental income in a FARJHO deal could also go higher periodically (say at every 3 year intervals) within the next 15 or 30 years while the interest rate cost has already been fixed for the next 15 or 30 years. That may make the total returns outcome even better than projected.

2. The key to success of this trade is the current positive carry (rent income could be obtained higher than the mortgage interest cost currently). Very few other relatively safe financial assets could generate such a high yield in dollar terms at the moment.

3. Using the money to invest in speculative gold, silver or other commodities would generate no yield at all and their high prices could suddenly crash and have a free fall. In contrast, it is unlikely there would be a further “crash” in the US residential real estate market going forward. It may at most drift a bit lower before it would eventually rebound, given a no inflation scenario within the next few years. As long as there is a positive carry, the chance that the trade would lose money would be minimal. With high inflation, this Bernanke Arbitrage trade could really win big.

4. Comparing with using that money to invest in stocks. Few stocks would have such high secured dividends for such a long period with such a high appreciation potential at the same time. Stock investments could also potentially end up being zero due to fraud or mismanagement such as Enron, WorldCom, etc. It is unlikely that investors would lose their shirts entirely on real estate.

5. With a current average 6% annual minimum dividend yield from rental income and the unlimited upside growth potential in home equity through investing in a FARJHO transaction, why would any free market investors put their money into a residential mortgage which only generates 3.86% annually at the moment with no upside appreciation potential at all for the next 15 years? The answer really lies in the name. This trading strategy is hence called a “Bernanke Arbitrage” trade.

Don’t stay a victim of Fed’s QEs. Big banks on Wall Street should not be the only ones who have benefited and continue to benefit from these unwise economic policies for our country. If we can not stop them. Why not join the loot? Let’s make Quantitative Easings work for the American working class people and home owners on Main Street!

Filed under: Economic Viewpoints, FARJHO, InvestorsAlly, Arbitrage, Bernanke Arbitrage, Bernanke Arbitrage trade, Cash out refinance, FARJHO, Loose monetary policy, QE2, SwapRent

05/06/2011 The Bernanke Arbitrage – Increasing home equity exposure through FARJHO (SM) near the bottom of the residential market

An easy financial arbitrage could be established by current home owners who have paid off their original mortgages on their own properties, assuming they have some income sources to secure a new mortgage on their current properties. Alternatively, any homeowners who have existing excess home equity to do cash out refinance could also take advantage of these timely arbitrage investment opportunities.

With the current long term fixed rate mortgage level around 5%, the home owners could use that money to invest in another home as a partial owner, i.e. a JPI (Joint Property Investor) to help another AHO (Aspiring Home Owner) to own home. From the JPI’s perspective, he/she could earn around 6% almost guaranteed minimum annual income through the rental payments made by the AHO in a FARJHO (SM) deal. As a result, the JPI could sit on a small annual positive cash flows (6% – 5% = 1%) while increasing the long term capital appreciation potential from his/her stake in the FARJHO (SM) LLC member interests.

Wouldn’t this be a great “Bernanke Arbitrage” as an inflation hedge for average Joe home owners on Main Street while Bernanke and his crony Wall Street cohorts keep enjoying the money for nothing through the Fed’s near zero interest rate policy and repeated QE’s?

With the dollar depreciation and high inflation almost a certainty as the Federal Reserve continues their loose monetary policy, increased home equity exposure would very likely outperform most other financial assets in an inflationary scenario. Borrowing money from GSEs, guaranteed by FHA at 5% or even lower for the long term may not be as good a steal as many Wall Streets cronies get but it is indeed better than nothing.

Isn’t it time that the Main Street jump on the bandwagon to get even with Wall Street? If the elite minorities on Wall Street could get money for nothing and make themselves more and more obscene profits, why can’t average Joe try to do the same on Main Street, rather than sitting there waiting for bread crumbs falling off from the Wall Street riches?

Don’t get mad, get even. Main Street needs not jettison Capitalism and embrace Socialism to solve their problems. They need to stand up and learn more on how to make Capitalism working for them. The revenge of the nerds is coming!

Filed under: Economic Viewpoints, FARJHO, InvestorsAlly, Arbitrage, Bernanke Arbitrage, Bernanke Arbitrage trade, Cash out refinance, FARJHO