Real estate investing in an activity that favors the passive approach over the long term.  That was clearly demonstrated in an article in The Baltimore Sun by Susan Reimer,PMN - getting high returns with private mortgage notes "Turning two lattes and a cocktail into a retirement fund" in which she focuses on how small savings can add up to a huge amount down the road.  High yield real estate investing in private mortgage notes optimizes those returns for passive investors with a long term horizon.

In her very useful Baltimore Sun piece, Reimer discusses how Gail MarksJarvis, personal finance columnist for The Chicago Tribune, wrote about how saving $20 a week, the cost of two lattes and a cocktail, becomes $480,000 in 40 years with 9.8 percent return.  The overall approach there is laudable, how saving little amounts can add up over time.  But the 9.8 percent could be difficult to come by, with low yields for bonds, bank accounts, and many expecting the stock market to fall.  Rob Arnott, head of Research Affiliates, stated in a recent Money magazine article that he expected stock returns to be 4-6 percent, which is about 50 percent lower than 9.8 percent.

Enter, stage right: private mortgage notes.

Private mortgage notes are a form of high yield investing to convert the "two lattes and a cocktail into a retirement fund."  Private mortgage notes are loans made by investors to entities to buy real estate.  These notes provide funding where traditional lenders such as banks, credit unions, and mortgage brokers fall short.  While individuals can finance single transactions, it is wiser to be a passive investor with others in a pool of money that finances a number of mortgages.

As for the 9.8 percent return needed, Shaun Cohen, President of EquityBuild Finance, the funding arm of EquityBuild Finance, a real estate company, reported in a recent interview that 12 percent was the average return for its notes.  Even more compelling is that there have been no defaults.  The terms of the private mortgage notes have also been short, too.  That is very appealing for investors as it allows for the funds to be continually rolled over while not being exposed to just one project.

The yield can be enhanced by holding private mortgage notes in a retirement investment account, such as an individual retirement account (IRA).  If the 12 percent average is earned, it will be much higher as there will be no taxes on the investment income.  If the private mortgage note is sold for a profit, the capital gains will not be taxed, either.

In addition to the yield, the flexibility of private mortgage notes is unparalleled.  So long as the terms are legal, the private mortgage note can contain whatever provisions are agreed to by the lender and the borrower. If the lender wants a significant cash payment down the road, there can be a balloon payment provision.  Should the private note funder want to keep income low for the present, there can be smaller payments in the earlier stages or the private mortgage note.  There is complete flexibility.

Reimer and MarksJarvis point how a very useful approach to investing that favors the long term.  For private mortgage notes, passive investors utilizing a long term approach with EquityBuild Finance should continue to do well.  With 12 percent returns and no defaults, a private mortgage note is certainly more rewarding than two lattes and a cocktail!