Investing to simply beat the rate of inflation is hardly a challenge.  But even that low barrier has proven to be too formidable for many as Treasury-Inflation Protection Securities (TIPS), government bonds created to yield more than inflation, are falling in value, resulting in huge losses for the owners, according to Carolyn Cui in a recent Wall Street Journal article, "Inflation Shield Loses it Appeal."

After reading Cui's very useful Journal piece, what does become more appealing is passive investing in private mortgage notes with a long term approach.

Private mortgage notes are when an individual or consortium of investors contribute capital to finance the purchase of real estate.  For an individual, it is best to join with others in providing private mortgage notes.  There is greater protection as their is much greater diversity in the assets that are financed.  It is very risky for an individual to provide a private mortgage note for a single transaction.  A pool of private mortgage deals is far more preferable.

This mode of private mortgage financing can also be very lucrative.  Shaun Cohen, President of EquityBuild Finance, the funding arm of EquityBuild, a real estate investment firm, reports a high annual yield in the returns from private mortgage note deals.  Jerry Cohen, the President and Founder of EquityBuild, has participated in more than two thousand real estate transactions as a principal, so there is a great deal of experience that underwrites the private mortgage deals of EquityBuild Finance.

For those looking to prevent inflation from eroding the value of their assets, that can be accounted for in the structure of private mortgage notes, too.  A very attractive feature of private mortgage notes is the flexibility.  The terms are set between the lending party and the borrowing party.  If the provider of the private mortgage desires a provision to hedge against an increase in inflation, than language can be added so that the rate charged rises.  That makes the private mortgage notes superior to TIPS, not to mention the far greater yield.

In addition to inflation, putting private mortgage notes in a retirement account will also shield the investment from taxes.  When held in a retirement account such as an Individual Retirement Account (IRA), the income from a private mortgage note is tax free.  Depending on the tax bracket, a 12% rate, as an example, will be much, much higher.  If the private mortgage note is sold for a profit, the capital gains are also tax free when it is part of a retirement account.

Long term nvesting in private mortgage notes for the long term as a passive party will also put time on your side.  That 12% return will double your investment every six years.  For a TIP yielding 3%, it would require 24 years for the investment to double in value.

The math for that equation is hardly complicated for deciding which is the best investment.

The passive investor in private mortgage notes with a long term approach will enjoy many advantages over other assets such as TIPS in return, flexibility, and other vital features.  Putting the private mortgage note in a retirement account also enhances both the yield and the capital gains for the investor.  While other assets lose the appeal for investors when inflation rises, private mortgage notes will continue to provide superior returns.