Prepare for "Returns for US Stocks be Dismal" with Private Mortgage Notes:-  In the Money magazine Investment Guide 2013 issue, Penelope Wang wrote a very useful article, about what to do if "The Long Term Returns for U.S. Stocks and Bonds Turn Out to be Dismal."  In Wang's fine article in Money magazine, Rob Arnott, Chairman of Research Affiliates, was quoted as saying, "Stock returns are likely to average 4% to 6%."  

There is no doubt that much research went into Arnott's statement.  Just a little research will lead investors to private mortgage notes, which have averaged 12% returns for those investing with EquityBuild Finance, the funding unit of EquityBuild, a real estate investment firm.  With mortgage rates rising, the return from private mortgage notes should go higher, too.

Private mortgages are financing provided by others than traditional lenders such as banks, credit unions, and mortgage brokers for the purchase of a property.  The best way to profit from private mortgage lending is to join with a pool of investors, funding a wide variety of properties.  That way the passive investor benefits from a diverse asset portfolio.  It is much riskier for an individual to provide a private mortgage for a single transaction.  As with all investing, risk management is a critical component.

The 12% return of a private mortgage note can be increased by holding it in a retirement account, such as individual retirement account (IRA).  When an asset is held in a retirement account, there are no taxes on this form of high yield real estate investing.  That means the investment income from a private mortgage note is tax free.  If the private mortgage note is sold for a profit, the gains are tax free, too.

In addition to higher yields, there is much more flexibility and much more control for those investing in private mortgage notes.  All of the terms of a private mortgage note can be set between the parties involved, so long as the provisions are legal.  If the lender wants to keep taxes low, there can be lower payments at first.  Should a large chunk of cash be desired down the road, there can be a balloon payment clause.  The private mortgage note provider can also participate in any increases in the value of the property by having an equity kicker section in the loan agreement.

What Rob Arnott was predicting in the Money magazine piece is actually the history of investing.  

Yes, the stock market has done well in recent years.  But it is starting to fall as the bull market is obviously the product of the Federal Reserve's expansionist monetary policies, which simply cannot last forever.  Those concerns are why the Dow Jones Industrial Average is down more than 3% for the last month of market action.  

By contrast, over the last 200 years, real estate investing has created about 90% of the world's millionaires.  Over the course of The Great Recession, stocks and bonds plunged in value as the level of rental income in the United States actually increased.  The future should continue to favor real estate investing with private mortgage notes outperforming stocks and bonds (again).