There is no such thing as a perfect buy in real estate investing or any other asset class, but private mortgage notes have much to offer.  With both security and a high yield, private mortgage notes are an ideal financial vehicle for passive investors with a long term horizon. 

Private mortgages result when an investor finances the purchase of real estate for an entity.  A single individual can provide a private mortgage for an individual transaction.  That is generally not advised, however, as it is very risky.  What is far more appealing is for an individual to become a passive investor in a consortium of investors that fund a wide range of properties with private mortgages.  This provides needed risk management for a real estate investor through diversity in the private mortgage notes being provided.

A major feature in a private mortgage note being an appealing investment is the high yield.  Many times it can be in double digits.  With returns that high, the investment can double in about six years.  

To enhance the return even more, a private mortgage note can be part of a retirement account, such as an Individual Retirement Account (IRA).  When that happens, the investment income from a private mortgage note is tax free.  If the private mortgage note is sold, then the capital gains are tax free, too.  Having assets such as private mortgage notes in retirement accounts also provide a layer of legal protection, too.

Making investing in private mortgage notes even more alluring is the flexibility.  So long as it is legal, the terms of a private mortgage note are completely up to the lender and the borrower.  In general, the party providing the funding has the upper hand.  That allows for private mortgage providers to set the terms to meet their high yield real estate investing needs.  

Should there be a need for a large parcel of cash in the future, the private mortgage provider can have a balloon payment provision.  If the private mortgage funder wants to keep income low in the beginning for financial planing purposes, there can be a graduated scale of payments.  If the lender believes the property being financed will rise in value, there can be terms in the private mortgage note allowing for participation in the increase in the equity.

Like a rental property, private mortgage notes provide both income and capital gains.  But the rental income does not come with the substantial expenses of maintaining real estate, or worrying about a tenant moving out and finding a suitable replacement.  Based on the criteria of lenders, this is considered to be 25% of the rental income.  That pumps up the overall return of a private mortgage by one-quarter, as opposed to rental real estate.  

No, private mortgage notes are not perfect investments.  But for the passive, long term investor looking to profit from financing real estate deals, private mortgage notes are attractive, especially with the flexible terms and high yields.