Often referred to as promissory notes, these are documents that state the amount owed, interest rate, and years to repay a debt and 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 so they are low risk and relatively guaranteed 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. To make this investment safer, 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 (avoid any lower as it makes foreclosure, if necessary, very difficult)
- When the borrower has bad credit, have him sell part of the ownership to another backer creating a tenancy in common
Return to Investments...
