Investing in Mortgage Notes
So, you can’t stand the risk or volatility of the stock market and the banks aren’t paying anything, bonds value may drop if the interest rates rise. So where is one to put there money to get a save return? One option is Mortgage Notes.
What is a Mortgage Note?
It is essentially a mortgage or promissory note secured by a piece of property and is a promise to repay a specified sum of money plus the interest at a specified rate and length of time to fulfill the promise.
It Sounds Risky
Well first of all it is back by a hard asset, Real Estate, oh did I mention you don’t have to manage the property? Your not the Landlord, so you won’t have those types of headaches. The note is secured by the property, if the borrower defaults you will end up with the property. But, if there is significant equity in the property the owner will do everything possible to avoid default.
I am Confused how about an Example?
Ok, lets say a property sold for $240,000 the buyer put $40,000 down payment. The seller carried back a note for $200,000. Let’s say the note was at 5% interest. That would make the monthly payment at $1073 per month for 360 payments. You have an opportunity to buy the note after five years have gone by (the seller would like to cash out at some point). This means that there are 300 payments remaining. After 5 years the principle balance remaining would be about $183,349.06. If the owner cashes out they have to realize they won’t get full value for the remaining loan. So you offer something less say $163,000. The LTV is 68% and your return on your investment is 7.9%. There is currently close to $80,000 in equity in the property even if there was 0 appreciation over the last 5%. Talk about low risk, and a high rate of return without the volatility of the stock market.
It just keeps getting better – Tax deferred or tax free
You can purchase notes in or out of a retirement account? Maybe your goal is for retirement income. If so, you can purchase a note within a self-directed IRA! That way the monthly note payments and interest earned can stay in the retirement account tax deferred or even tax-free with a self-directed Roth IRA.
If you need money for income now, you can also buy notes outside of a retirement or broker for a referral fee.
So, where can I buy a Mortgage Note?
Like any investment do your due diligence, before investing. You can start by reading articles from the links below. Always check with your investment advisor before investing in any asset, including Mortgage notes.
Finding Cash Flow Notes
Buying and Selling Notes for Residual Income
How to Avoid Going Broke Buying Real Estate Notes