In this article, Im going to share some information about real estate notes, how they work, and how to invest in them if you choose to. I won’t be able to include everything about notes, but at least can lay out the basics of what I think you should know. Notice I said “real estate” note.. because there are many types of notes and often do not have the protections that a real estate note has.
When you purchased your home, and if you financed it using a bank, you signed a note. That note spells out the terms that you agreed to in order to pay the lender back. The note consists of the amount of the loan, the interest rate, the time frame you have to pay it, and everything else regarding that loan. A note is a very valuable asset. I think of a note as a fixed income opportunity, because the owner of the note can project exactly what their return is and what their income is on the amount of money that they loaned and/or invested.
A real estate note is a wonderful thing, because it has comes with protections in case the payor of the note defaults. That protection is a tangible, real property that is assigned as the collateral. And this is the purpose of a mortgage. When borrowing money to buy a property, not only does the borrower sign a note, but they also sign a mortgage. The purpose of a mortgage is to attach the real estate collateral to the note, which is publicly recorded at the county that the property resides in. This places a legal right of lien to the note holder. Its a beautiful thing… I mean think about. How many investment options do we have that have such a nice back up plan?
I like to think of it like this: You either get , or you get. Meaning, you either get the payments and interest as spelled out in the note, or, you get a real estate property .
A note can be drafted from the very beginning of a real estate transaction, which means a lender can lend money on a purchase , hence a new note is created.
A note can also be bought and sold. So a person can buy an existing note, or sell an existing note. The real estate collateral just transfers through an assignment. Its pretty basic once you’ve done it a couple of times.
The great thing about real estate notes is no matter how you are involved, whether it is lending, buying, or selling, the transaction is conducted using professional third party services. In Arkansas for example, a title company will draft the documents, handle the transaction, distribute the monies accordingly, and perform the proper recordings for all parties. Some states use attorney offices instead of title companies.
Notes can be professionally serviced, so the note holder will never have to “collect” or manage he borrower. A 3rd party licensed servicing company can be used to collect payments and manage the loan. This is huge !
Another thing I love about real estate notes is the ability to buy them through an IRA account or retirement account. This includes Roth IRA’s, HSA’s, CESA’s, traditional IRA’s, and more… The key here is to choose the right custodian for your accounts so that you are allowed to invest in anything that the IRS deems appropriate for an IRA account. And yes, a real estate note is allowable by the IRS for a retirement account !
In summary, here are some key benefits of owning a real estate note:
– Protected by real estate (in my opinion this makes it very low risk)
– Fixed income , so the earnings can be projected without the risk of losing value
– Very flexible , meaning different price ranges and even different terms (lengths of time)
– Allowable for retirement accounts. This is huge !
– Handled by professionals on both the front end and the life of the note
-And more !
I hope this article was informative. Please reach out to us if you have any questions, we are here for you.
Blessings,
Justin Patterson
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