These Books Tell the Story: Buy Properties and Private Mortgage Notes, not Mortgage-Backed Securities:- When investing, the most important factor is to control exactly what your money is buying.  This is best accomplished through investing in real estate, either the property itself or a private mortgage note.  It can easily be achieved by passive long term investing, which is always the best for any asset class.  But it will not be the result of purchasing mortgage-backed securities.

 

For any entity, be it an individual or an institutional investor such as a hedge fund or private equity group, there is no more control in investing than in owning real estate or financing private mortgage notes.the quants

In these areas, an investor selects the property to buy or the mortgage to underwrite.  For an individual investor, that can be daunting.   But turnkey rental real estate is ideal as these properties have been selected, fixed up, come occupied with a suitable tenant and are managed by experienced professionals.  Private mortgage note financing can take place with a consortium of other investors to allow for a broad array of real estate mortgages to be funded so as to be protected from a diverse collection of properties.

As The Great Recession proved, none of that is true with mortgage-backed securities.

In the book, "The Quants" by Scott Patterson, a staff reporter with The Wall Street Journal, it was detailed how the most brilliant minds in the financial community suffered massive losses in buying and selling mortgage-backed securities.  Long story short, most of Wall Street, and the global financial community, had no idea what was being packed into and then bought by investors around the world in mortgage-backed securities in terms of the ultimate worth of the bond.  There was just precious little knowledge about the quality of the properties being financed or the borrower who was given a mortgage, which is pretty much most, if not all, of what should have been nailed down long before the first dollar was even wired.

The ratings agencies did not help out, either.  As Patterson notes in his book on page 180, "Bizarrely, the ratings weren't based on the relative quality of the underlying loan."  The Great Recession provided the answer as to what the results of that would turn out to be for global investors.

This is certainly not the case with buying turnkey rental properties or financing a private mortgage, either individually or as a group of investors.

In these transactions, the individual investor who performs the proper due diligence will know everything about the property being bought or financed.  As investors should endeavor to buy properties in areas in which they are familiar, just as the best investors in history such as Warren Buffett and Peter Lynch advise buying stock in the companies whose products you see selling well down at the local mall, there should be no unpleasant surprises like the ones encountered by investors around the globe from overpriced and poorly rated mortgage-backed securities that resulted in a loss of trillions in wealth from which many companies, communities, and countries have still not recovered.

Owning turnkey rental properties and private mortgage notes allows for individual to be a passive long term investor while remaining very much in control of the asset.  Individuals have a huge advantage over Wall Street in real estate in that the local area is better known.  Peter Lynch even wrote a book about this, "One Up on Wall Street."One Up On Wall Street

While Lynch's book is about stocks, the same principles apply for investing in rental real estate or private mortgage notes.  Individuals can see what is happening in their area, whether in terms of what is selling at the mall or what neighborhood has undervalued real estate.  From that knowledge, individual investors can outperform Wall Street in real estate investing with purchasing turnkey rental properties and financing private mortgage notes, rather than buying mortgage-backed securities.