Author Topic: Financing Mortgage through Investment in Municipal Bonds? Smart or Scam? Help!  (Read 995 times)

dfree86

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Hi Guys,

I'm a total real estate newbie but am working with a family member on financing a new property. The essentials are: he owns a lucrative, but small residential/commerical building in NYC and wants to use it to finance another property he aims to buy.

One mortgage broker has offered the following scenario through his firm:

1) Take a $2.5m commercial mortgage on the owned building. The payments on this mortgage will be "interest-only" and thus low for the first 10 years or so of the loan, meaning paying only interest and no principal. After 10 years we would restructure to either continuing paying only interest or try to lock in a better rate. This is essentially kicking the mortgage-principal-can down the road 10-20 years, when the newly purchased property appreciates and can be sold to help payoff the principal here.

2) Invest that $2.5m in municipal bonds portfolio

3) Have his firm actively manage the bond portfolio to produce a 4.2% return (above the normal 2%-ish muni bonds often return). He claims that because his firm is massive ($90 billion capital managed), they have access to best bonds and rates. Using "smartest guys in the business", he can guarantee minimum 4.2% return to cover the payments (below).

4) Use that 4.2% return from Muni bonds to pay a $3m mortgage (at 2.75% interest) on the newly purchased property, and still have a little leftover to pocket each month.

In this way, the first property pays for the second.

To me this sounds like a too-good-to-be-true situation, but I know nothing about Muni bonds or paying interest-only.

Does it sound like smart or waaaaaay to risky?

thanks!

waltworks

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Hahaha!

It is a crazy stupid risky plan.

-W

SwordGuy

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I'm not sure why you need an advisor to pick the bonds.  It seems like a reasonably straightforward process to buy them for yourself.

I'm interested in getting some bonds in about 2 years, so I'm learning about them now.   

I'm very iffy about municipal bonds due to one issue.  It may be that it's already built into the ratings of the bond issuer, but I'm concerned it isn't.  I think quite a few cities in the US may have trouble meeting their pension obligations due to overly generous pension and healthcare plans.   If so, it might cause some of them to go bankrupt.  I don't know whether that projected cash flow issue is already factored into the credit ratings or whether this will be yet another perfectly predictable "surprise" the news media tells us about one day.