When we talk about everyday success stories, a majority of these come from the real estate industry where our average Joe made a fortune with real estate investments. Real estate is a time-tested investment tool, which is likely to offer decent returns to the average investor. However, not everyone has the skills or time to manage real estate investments. If you are a self-employed individual who would like to invest in real estate, individual 401k plans offer manageable investing options such as mortgage notes.
In simple word, a mortgage note is a binding agreement between a buyer and a lender, promising the repayment of a loan within a given period along with applicable interest rates. In this post, we’ll talk about private mortgage notes and how you can invest in them.
Private Mortgage Note Investment with Individual 401k Plans
Private mortgage notes originate in private real estate transactions under which, the buyer purchases a property from the owner with conditional loan financing. A signed agreement between both the parties serves as the evidence for the financial agreement. Instead of financing the house through a bank, the buyer agrees to make a monthly payment to the seller with an agreed upon rate of interest. Unlike the buyer, the seller or lender holds the freedom to sell this note to a third-party investor, which then has the right to receive regular payments.
Why People Choose Private Mortgage Financing?
- Quick processing: Unlike traditional loans, private financing eases the closing process, cutting it down from several months to a few weeks.
- Lower credit requirements: Much like a bank, a seller will do a credit check but the lending requirements are comparatively lower.
Solo 401k Advantage in Private Mortgage Investing
Under the current IRS regulations, Solo 401k account owners enjoy complete self-direction, which means they can invest in private mortgages as per their discretion. For self-employed individuals, who are looking for a stable income stream, private mortgage notes offer a low-risk investment solution. However, make sure that the purchase is processed through Individual 401k plans and the monthly payments find their way back to the retirement account only. Your investments can enjoy tax-deferred growth. If the borrower fails to satisfy the repayment terms, you have the right to seize the property or resell it to another buyer. Another alternative is to sell the mortgage notes to third-party investor or banking institution, enjoying above-average returns on the investment.
Before purchasing private mortgage notes, make sure to evaluate the market value of the property. It will help to run a credit check on the borrower to ensure regular monthly payments. Always choose a property that can be easily sold and it is best to start with single-family homes.