Dear Janine,

 
Our neighbor's brother runs a company called XYZ Group. He essentially acts as a bank to make large commercial loans and since he is able to turn loans over in days rather than weeks is able to charge higher interest rates. He has a current deal that would make 18% for 6-18 months and claims to average 15%. The entire amount of interest gets passed to us. He has offered to manage our 10,000 (short-term savings) and our kids short and long-term as well with the option of monthly deposits that would get put into loans as they come in. What his family, (who are my neighbors) do is take loans out against their house and cars. All of the loans XYZ Group makes with this money are backed up with collateral, which makes this seem like a solid idea. He has been doing this for 7 years and has lived in the area all his life. He claims to have never lost people's money and is financially independent. We are considering taking out a 2nd mortgage.  
  
Are there any questions we should be asking? Advise? Warnings? We currently owe 80,000 on our house and no other debt.  –Andrea 
 

Dear Andrea: 

This is not really my area of expertise since I’m not a financial planner or accountant or other trained financial professional. However, I get your question all the time! Yes, there are some questions you need to be asking. Here they are:

• Have you and your husband opened IRAs (or some other investment vehicle) in both of your names?
• Do you have 6 months of salary in your short term savings account?
• Do you have 529 plans open for your kids?
• Do you have your IRAs maxed out for this year? Meaning, have you contributed all you can?

If you have yes for all this, then chat this opportunity up with your accountant before you make any moves to mortgages and borrowing money to finance this thing. There may be taxes that affect the income from these loans as well as financial penalties you may not be aware. Find out what the cost is before you move on.

 
If you haven't maxed out your ability to contribute to your IRAs (401k plans or other retirement vehicle) I would be very cautious about investing in anything that has such a HIGH rate of return. (At 15%-18% I would personally put on my sneakers and run as fast as I could in the opposite direction!) It is never good to put all your eggs in one basket. In my seminars I discuss the three areas of investing. You can find this in almost any book written by a financial professional.

• cash/bonds (funds)
• real estate
• stock (funds)

I am suggesting that you may want to be extremely careful moving in any one direction since you are on the wealth accumulation path. I have no idea if this plan with XYZ Group is solid or not. As a scientist I require data to make a decision. That means I have to see past years' work, extrapolation forecasts, etc. All I am trying to get across is that many of my clients become financially stable like you and then take ALL of their short term savings and dump it into a single investment. This is not the conservative approach to finances. I have always told you I am a conservative type investor.

 
You want to ask yourself these additional questions:

• If we take a second mortgage on the house and invest with XYZ Group, what happens if this opportunity fails?
• If we borrow money that is not ours to make investments, is this wise/frugal/appropriate?
• How many others have done this and it worked? How many have failed?
• Have we called other people that XYZ Group has worked with and chatted with them?

I'm trying to protect you in the long run from all sorts of investment opportunities that frequently pop up in wealth accumulators’ lives. Email after email that I get from clients tell me that they start saving money and have a nest egg for the first time in their marriages and then the single investment they made fails and they have to start over.