By Dr. Teresa R. Martin, Esq., REIA NYC
Investing in mortgage discount notes gives you all the benefits of investing in real estate while avoiding many of the typical drawbacks. But, did you know that it can help you save for retirement, too?
WHAT ARE PRIVATE MORTGAGE DISCOUNT NOTES?
Discount mortgage notes offer low-risk, secure returns while avoiding all the headaches and hassle of buying and maintaining a property as well as having to find and manage tenants.
HERE’S HOW THEY WORK.
A sizable part of the mortgage market includes private, or non-traditional mortgages. These kinds of mortgages come in two main flavors. Either they can be originated by a private lender or an investment group and secured by the borrower’s property, or the seller of a property can agree to lend the buyer all or a portion of the property’s purchase price- a setup called seller financing.
In the case of seller financing, the principal and interest payments are structured like a regular loan with an amortization over a 30-year period. The difference, however, is that the loan typically requires a balloon payment after five years. This gives the buyer enough time to refinance into a traditional loan. If the borrower is unable to pay the full amount after the five years are up, then the owner of mortgage note can foreclose and take back the property.
Private mortgage loans generally have higher interest rates than traditional loans, and it is this high interest rate that makes them an attractive option for real estate investors.
There is also an active secondary market for private mortgage notes which may give some piece of mind to investors who are concerned about the asset’s liquidity. Private mortgage notes are valued by a number of factors including: the principal balance, the amount of payments already made, the number of payments remaining, the property’s appraised value and the creditworthiness of the borrower.
INVESTING IN MORTGAGE NOTES FOR RETIREMENT
Many real estate investors are unaware of the fact that they can buy mortgage notes as part of their retirement account. If you are trying to generate money for retirement, then mortgage notes are definitely an investment to consider. With a self-directed Roth IRA, you can purchase a mortgage note and allow the monthly payments and interest earned remain in the account tax-free. It’s a secure non-traditional investment that can add some real stability and diversity to your portfolio- not to mention a great