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Investment Real Estate -- A New Twist: Be the Bank, Not the Landlord, and Get Rich Without the Work

I was a landlord for a decade, and I believe I probably lost a year of life for each year I tried to maintain 26 properties. I learned the hard way that the most efficient way to make money in investment real estate is to create a mortgage note and be the bank – not the landlord.

In other words, you become a private bank, financing the entire sale or part of the sale for the buyer. When you finance a sale of property, be sure to get a high rate of interest – generally 9% to 15%, depending on all of the other terms. For this article, let’s assume you sell to someone who can’t come up with all of a $20,000 down payment, so you finance $15,000 of the loan. The note should be due in five to 10 years, meaning the buyer will likely sell or refinance his mortgage within that period, and you’ll be paid in full.

Here’s how financing a portion of a mortgage can be extremely profitable and far less work than being a landlord, who is responsible for property maintenance. Let’s assume you charge 11% on your $15,000 loan, amortized over 30 years (this makes for an easier payment and a more attractive deal for the buyer, even though you’re receiving a very high rate of interest on the loan). The payment is $142.85, which includes principal and interest. Now, you could make it even more attractive for you by writing the note with monthly payments of interest-only at 11%.

This saves the buyer even more, as his payment becomes $137.50, but this does not amortize, or reduce, the $15,000 he owes you. Let’s assume the note is due in 60 months. You get $8,250 during this five-year period, and in the 61st month, you get the entire $15,000 that you originally loaned. As you can see, this is a very powerful investment, as you loaned $15,000 but you received a total of $23,250.

One final point. Maybe you are three years into receiving your $137.50 (meaning you’ve collected $4,950 in payments). Now, you decide you need a large sum of money for something – say, a vacation, home improvement, college tuition, or some other investment. You are still owed two years worth of payments at $137.50, or $3,300, and the balloon payment of $15,000. You have several great options, because you have the power of controlling a lot of money.

You can actually sell your entire note at a discount to a note investor. That’s right, there are people and companies all over the world that purchase mortgage notes (the actual payments that are due on a real estate transaction). The note you have, even though there are only two years left, would be highly attractive to an investor, because the payments are interest-only and because there is a $15,000 balloon payment due in 24 months.

Now, remember, note investors are out to make money, so they won’t offer you full price. They will either buy your remaining payments, probably for a discount of 10% to 20%, or they might purchase just the balloon payment, at the same discount, leaving you the remaining payments, or they might buy both the payments and the balloon.

So, assume you need $11,000. If you could get an investor to purchase your remaining payments and your $15,000 balloon for $12,500, I would think you’d be extremely satisfied. Remember, you’ve already made nearly $5,000 on your loan, so you’d wind up making nearly $17,000, and you don’t have to worry about collecting the payments any longer. Plus, you will get the “hot” cash that you require immediately. As you can see, financing part of the sale of a piece of property is an extremely solid investment.

These examples are just a few of the many ways to own mortgages, not property, and get rich without the headache of being a landlord. If investing in real estate notes is something you would like to try, you might want to consider starting small, like with a mobile home note. These can be very inexpensive to buy but are extremely profitable.

Mark Barnes is the author of the new novel, The League, the first work of fiction, based on fantasy football. He is also an investment real estate and home loan finance expert. Learn more about his suspense thriller at http://www.sportsnovels.com Get his free mortgage finance course at http://www.winningthemortgagegame.com

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