Investing in Notes

Real estate backed notes, mortgage notes, or promissory notes (all the same) are essentially a promise to repay a loan. When properly secured these loans are backed by property; ideally worth more than what is owed. The lender is acting as the bank and receives principle and interest payments as laid out in the note.

Many active real estate investors will sell notes to finance projects that are difficult to get bank funding on and are willing to pay a premium to secure the capital they need. When purchasing notes, you need to fully understand the value of the asset that is backing the note and trust that the seller of the note is trustworthy and able to complete the project. In the very small percentage of cases where a note goes into default, you have the right to foreclose on the property to recoup your money.

Here are the pros and cons of investing in notes:

PROS

• Because you are investing in debt instead of equity and therefore not regulated by the SEC, you do not have to be an accredited investor.

• The terms of your repayment are laid out for you. If you are looking for cashflow you can find notes that pay out monthly or if you are looking for long term growth you can find notes that keep your interest compounding until you are cashed out in full.

• Most notes pay between 6-12%. The percentage will be stated on the note and does not change. Typically, the higher the return the riskier the investment.

• Notes have a defined hold period usually between 1-5 years.

• The investment is backed by real property.

• You can use your self-directed IRA to invest in notes. You avoid paying income tax in that year so your investment can compound untouched.

CONS

• You do not own the property, so you do not share in the tax benefits of owning real estate.

• The investment is illiquid. You can’t request your money back early.

• The interest you receive is taxed as income

If you would like to learn more about investing in notes or hear how I personally use them please feel free to reply directly to this email or schedule a call.

Happy Investing,

J. Eric Gillem