In a recent column in The New York Times, Yale Professor Robert J. Shiller, one of the foremost experts on housing in the United States, wrote that, “There has been some good news lately: home prices have risen over the last year, and with those gains there has been a renewed sense of optimism.”

This “renewed sense of optimism” is well-placed as it is based on actual sales, not projections or forecasts.  As a result, it should be expected to continue into the future, with real estate prices continuing to increase.  This will result in a bull market for high yield real estate lending through the financing of private mortgage notes.

Real Estate On the RiseA private mortgage note is the financing provided for a property from an individual lender or a group.  According to Jerry Cohen, President of EquityBuild, a premier private mortgage investment firm, “There are two methods for getting started in private mortgages: Mortgage Pools and Direct Lending.  Mortgage pools are like the mutual funds of private mortgages. Each investor's money is pooled with the other investors participating in the pool, and the money is used for private lending.

Cohen, who was just awarded the prestigious “Moving America Forward” honor for the success of EquityBuild and EquityBuild Finance, its financial arm, furthered that, “Direct lending is typically reserved for seasoned real estate professionals due to the level of expertise that is needed to identify undervalued properties...”

Robert J ShillerIn his April 14, 2013 New York Times piece, “Why Home Prices Change (or Don’t),” Shiller notes that,”Home prices look remarkably stable when corrected for inflation.”  That is precisely what makes investing in private mortgage notes so appealing.  Shiller expects home prices to move along with the rate of inflation.

As high yield real estate investing at its finest, private mortgage notes have a much higher return for those providing the financing.

There are many reasons for this.

The first is that private mortgage notes have a tremendous amount of flexibility.  All of the terms are arranged between the lender and the borrower.  The interest rate that is charged is worked out per the elements of the deals, and the needs of all parties concerned.  There are no pre-set conditions.

That allows for the private mortgage note provider to profit in whatever way best serves their investing goals.  If the private lenders lives in the Chicago area and only wants to profit from the growth ahead in that market, than mortgages can only be financed in that region.  Should there be a part of the Chicago market that the private mortgage note financier feels is particularly promising, then loans can only be made for those neighborhoods.

Zillow home value indexEven better is that the private mortgage note lender can put an equity kicker into the loan.  That allows for the private mortgage note lender to gain from the increasing property value in those Chicago neighborhoods.  It can easily be part of the mortgage terms.  A provision like that should be alluring for a private mortgage not provider as prices are expected to continue to climb, which is shown by the chart below:

What can increase the return for the investor is holding the private mortgage notes in a retirement account.  That way the income received is tax free.  Any fees, such as upfront points, charged to make the loan will also not be taxed.  If the holder decides to sell the private mortgage note, then the profits will not be taxed, either.

Professor is certainly correct about the “renewed sense of optimism” in the real estate market.  There are bull market conditions, which make it an ideal time to invest.  Many are looking to buy properties and finding it difficult to secure a loan, especially for rental real estate.  That creates more gains for those active in high yield real estate investing.  As housing prices continue to increase, so will the opportunities to profit from providing private mortgage notes.

by, Jonathan Yates: EquityBuild News Contributor