by Karyn Cortez
Watch out, retirement savers. In case you haven’t heard, the Trump Administration put the wheels in motion to halt the Department of Labor from rolling out its fiduciary rule requiring financial advisors to act in your best interest. Who was most impacted by the rule? Those who work on commission, such as brokers and insurance agents.
What’s the fiduciary rule?
It’s a simple enough concept: A financial adviser should be legally required to put their clients’ best interests ahead of their own. But it’s actually not the law.
Why does this matter to you? The rule would require financial advisors and brokers to put your interests above their own when working with your retirement accounts. Currently, if you work with a financial advisor who is a registered broker, he or she only has to recommend investments that are “roughly suitable” for you. That means if your advisor has the option between, say, two similar mutual funds, but one pays out a higher commission to the advisor, he or she can put you in that one—even if the other fund has lower fees and would boost your investment portfolio in the long run.
What’s an investor to do?
The smart thing to do is to investigate alternatives. If you’re interested in safety, you probably already know that the stock market can be volatile, to put it mildly. Between January 2 and March 20, 2018 the S&P 500 rose 6%, then dropped over 10%, and so far netted a paltry 8/10% gain. And the DJIA? As of March 20 it’s posting a 4/10% LOSS. Bonds aren’t doing much better. CDs? Banks are trumpeting 1.25% APY if you lock up your money with them for 5 years! How about annuities then? Sure, if you want to give up access to your funds and buy something that won’t pass on to your heirs in exchange for a return that might not even keep up with inflation.
Private Mortgage Notes
Many savvy individuals turn instead to private mortgage notes to grow their wealth. A mortgage note is a mortgage in which the person receiving the payments is an individual, or private entity, rather than a traditional bank. The note acts as a lien against a property, which serves as collateral for the payment described in the note. Short-term notes, where an individual acts as the lender, are secured, local investments that create a passive, high rate of return.
Why would someone buying a piece of property use a private lender instead of going to a bank? Many real estate investors buy properties under market value with the intention of upgrading or rehabbing the property, and then either turning it into a rental or reselling the upgraded property at market value (flipping it). When they do this, they don’t need a conventional mortgage, which can take weeks to obtain, and locks the investor into a 7-year, 15-year or 30-year payment.
Instead, real estate investors borrow money from individuals to buy and rehab the property, and often pay the principal plus interest back in as little as 6 months. For the right to use the lender’s money for such a short period, the borrower guarantees interest rates of 8% APR, 9%, 10% or higher, depending on the deal. The loan undergoes underwriting that is often more stringent than even a conventional mortgage, has a low loan-to-value ratio (the amount of money loaned vs. the value of the property), and is secured by the property itself. If the borrower defaults, the property reverts to the lender, with 35% or more equity already built in.
Short-term. Secured. High interest.
You have idle cash, or low-interest-bearing liquid investments, or even equity in real estate that you can borrow against at a low rate in order to turn around and lend at a higher rate – but where do you find these notes?
- You might already know someone who is a real estate investor; you can partner with them.
- You can go online to find note brokers.
- The best way is to reach out to your local real estate investors association (REIA). You’ll meet a community of real estate professionals with experience in every facet of real estate investing.
Investing in private mortgage notes is nothing new. Most people just haven’t heard about notes because their financial planners, brokers, or brokerage firm wouldn’t make any commission!
If you have questions or would like to learn more about private mortgage notes, call Karyn Cortez at 302-544-0684.