Often referred to as “promissory notes,” these assets are documents that state the amount owed, interest rate, and years to repay a debt. They are usually accompanied by a mortgage or deed of trust that pledges the property in the case of nonpayment. Notes offer investors the security and benefits of real estate without the burden of maintaining a rental property. You can buy or originate notes and loans with IRA monies. To buy a note, consider contacting banks, lenders, or brokers. You will want to have the property value appraised, examine the borrower’s credit, complete a title search to check for liens, purchase title insurance, and find a collection agency to receive the payments. Banks and other lenders often sell notes at a discount making them less risky almost guaranteeing a profit.
If you want to originate loans, real estate companies, mortgage brokers, newspaper ads and builders/contractors associations are all great sources. Be clear about your goals (short term profit, stability, 12% growth, etc) and any restrictions (location, type of property, borrower’s credit, etc). If you originate a note, it is usually because the borrower has problems with credit history or overextended credit. You may want to ask for a credit report, current bank statement, and written explanation of credit problems.
Consider these ways to lower your risk:
- Ask the borrower to add more collateral with additional real estate
- Have the borrower find a cosigner for signature strength
- If there are other loans in existence on the same property, loan the borrower more money to pay those off so you are first or second mortgagor
- When the borrower has bad credit, have him sell part of the ownership to another backer creating a tenancy-in-common
All examples are for educational purposes only, and should NOT be construed as investment advice. Always contact a qualified tax attorney or advisor prior to making any financial decision.
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