Let's look at 10 different ways to make over a 10% rate of return in a market of the lowest rates we have seen in years. These are not necessarily in order except for number one. I debated that one. Being involved in education, it seemed self serving to put that one first, but I have to go with what I believe to be true.
- Invest in yourself
- Early mortgage payoff
- Invest in a note – self
- Buy from a broker
- Buy a partial
- Pre-pay a partial
- Short term TD funding
- Pay off other loans
- Make a mortgage loan
- Purchase and re-sell RE
1) Invest in Yourself
If you think education is expensive – try Ignorance! There is no greater dividend that will ever be paid than your return on your investment in education. Provided it is the right education. What is right? Education that teaches you how to excel, make money, negotiate, be creative, take calculated risks and strive to get ahead in any way. Education that teaches you how to work for someone else and put in just enough to get by is detrimental. Education from someone who has never left school and faced the real world should always be questioned.
2) Early Payoff on Mortgages
It's a simple mathematical conclusion that if you have money invested at 6% and are paying on a home or rental mortgage at 10% – that it doesn't make sense. Yet in many cases, people don't see the scenario clearly. If you have any long term money invested at less than your home or other mortgage – use the money to reduce the mortgage.
What is a little more obscure is that you can make monthly contributions to paying off high rate loans with a simple phone call to the lender. If you pay an extra $100 each month on a 10% amortized mortgage loan – the $100 goes directly towards principle and pays your home off years earlier. What is your risk? None! Debt reduction is a guaranteed rate of return.
3) Invest in a Note
Investing in discounted mortgages can offer safe rates well above 10%. If you know how to do the simple paperwork or have a consultant or team of pros that can do the work for you, it can be a safe, simple process. If you don't have the skills or an associate that does, you can contact the National Note Franchise office in your area that can help you do the “due diligence” and put together a professional package on the mortgage for a reasonable fee.
4) Buy From a Broker
Many note buyers in the marketplace are brokers who buy a note at one price and sell at another. You may be able to achieve an attractive yield by buying from them or investing with them. Due to a few brokers out there being “Ethically disoriented” you must use caution and review their packages, data and representations carefully. There is a large distinction between investing in already existing mortgages with a discounted mortgage broker and originating new mortgages with a loan broker. The latter carries a greater degree of risk and greater need for verifying the documentation, supporting values and data.
5) Buy a Partial
In cases where a note seller needs a small amount of cash, doesn't want to take a large discount or your investment funds are limited, the purchase of a “partial” can be a good option. Buying a partial involves the purchase of less than a full interest in a mortgage. For example, a $10,000 / 10% / 30 year note would have a payment of $87.76 per month. To purchase this note at a 20% yield would cost $5251.87. Buying a partial could be as simple as buying half of the note. Let's say we purchase the first 15 years of payments for $5,000. Our rate of return would be 19.99% on our investment. Partials can be a powerful tool. There are also strategies where you buy the latter portions of notes (Tails).
6) Pre-pay a Partial
Let's say you are paying on a “private” mortgage loan. The reason a private mortgage would be important here is because there is some negotiation involved and institutions become faceless entities where no one can make a decision (or cares to) when it comes to negotiation. We apply the same concept of buying a partial to a loan we are paying on. It may be that the individual we are paying could use a little cash and would allow a partial pre-payment discount. If the rate were 8% and I want a 16% yield, I am going to need some discount. For example, let's say you are paying on a $10,000 mortgage at 8% over 15 years with a payment of $95.57 per month.
If you have $2000 to invest and want a 16% rate of return, you could arrange to buy (pre-pay) the first 25 payments. Also, using the analogy above, I could buy the first three years of payments and have a 39.44% yield. It's a simple concept to sell. You owe $10,000 over 15 years. You pay one fifth of the principle balance ($2,000) for one fifth of the payments (3 years or 36). This technique is simple, logical and profitable.
7) Short-Term TD Funding
You can act as an interim line of funds for another mortgage broker of yourself in buying mortgages that are pre-sold to another party. Your money is tied up for a short time, but that short time is crucial. The biggest edge a discounted mortgage investor can have is to have quick funding for mortgages. Countless good mortgages get a way from investors because they can't move quick enough to fund the transaction. Their “upstream” funding source may have good prices, but slow funding time. This gap provides a great opportunity and mortgage brokers can pay a premium price for these funds.
8) Pay Off Other Loans
Needless to say, if you have any loans or accounts (not just mortgage loans) where you are paying high rates, one of the best investments you could possibly make is to pay them off. Some of these rates may be hidden or hard to find. Accounts like store charge cards or doctors commonly have a 1.5% monthly interest rate or service fee. That is 18% annually.
9) Make a Mortgage Loan
If you know the process of making or mortgage loan or have the help of the pros, you might make what is called a hard money loan in a first or second position on a property. Some individuals use their IRA's or other retirement funds to make well secured mortgage loans of 10% or higher, collect the payments and then make another loan when the have enough money.
10) Purchase and Re-Sell Real Estate
There are many techniques where you can purchase a property and re-sell it quickly using seller financing for a very good, secure rate of return. I began using this principle in the mid 70's with what I termed a “low down wrap-around” which I later detailed with many other note investment techniques for my students in my books “The Paper Game”, “Creative Paper Formulas” and “Mortgage Magic”.