"Embrace" Private Mortgage Notes in Real Estate Investing: In a recent article in the Financial Times with the title, "Obama Needs to Embrace the Promise of US Cities,"  Edward Luce wrote of the great potential and stirring comeback that is taking place in American urban areas.  For those looking to capitalize on real estate investing opportunities in this revival, private mortgages are an ideal financial vehicle.

Private mortgage notes are loans made for the purchase of real estate by an investor or an investment group.  While a single person can finance an individual property with a private mortgage note,  that is very risky.  A far better approach is for the individual to be a passive investor with others in a consortium that endeavors to profit over the long term.  That provides far more diversity in the asset pool.  It also allows for the passive investor to prosper from the greater experience of others in the transactions.  As with all investing, these are important acts of risk management when funding private mortgage notes.

In addition to this diversity that offers greater risk management, the terms of a private mortgage note are very flexible.  

Pretty much, so long as the terms are legal, anything is allowed.  If the private mortgage provider wants a chunk of cash down the road, there can be a balloon provision for a large payment.  Should the private mortgage investors want to keep taxes low in the beginning period of the terms for the note, the initial payments will be reduced.   If the private mortgage note financier wants to participate in the rising value of the real estate that was funded, there can be an equity kicker in the terms.   This flexibility is a very appealing part of private mortgage notes.  It is also another important part of risk management.

Private mortgage notes are an excellent for high yield real estate investing.  The monthly payments are like rental income, without having to maintain the property or find new tenants.  The returns are in the double digits.  That means that the funds invested will double in about every six years, if the return averages 12%.

To enhance the return, private mortgage notes can be held in a retirement account, such as an Individual Retirement Account (IRA).  When this takes place, the investment income from the private mortgage note is tax free.  If the private mortgage note is sold for a profit, there are no taxes on the capital gains, either.

What also takes the returns higher when compared with owning rental property is there are no repair expenses or lost income from not having a tenant.  Mortgage lenders deduct 25% of rental income to account for this in applications.  That means that the double digit returns of a private mortgage note should be considered one-quarter higher when considering a comparable piece of rental property as an investment.

Luce was certainly right in his excellent Financial Times piece that Obama should do all possible to further the rebound in the American housing market.  There are many ways to profit from that in real estate investing.  With the high yield and low hassle factor, private mortgage notes are very alluring for passive investors with a long term approach.