One passive way to make steady and above-average returns is to invest in promissory notes. Promissory note investing is sometimes called private investing. The money you lend can be secured by collateral to give you peace of mind.
Investing in promissory notes
What are promissory notes?
The promissory note is a contract between two parties and includes the terms of the money borrowed – how much, at what interest rate, and the frequency of payments. Promissory notes can be unsecured (which means it’s high risk) or secured by collateral (lower risk).
Promissory notes are typical in real estate. Real estate investors need cash to buy and renovate their fixer-uppers. They don’t hold on to the property long after renovating. So investors get their money back in a short period but can earn a higher rate of return and their money is backed by collateral.
Promissory notes can also be car loans. The only difference here is that a car instead of real estate will back the loan.
In this case, you act like a bank. You lend money to someone and collect interest. To succeed in private lending, you need connections with people who need money.
Do you have to handle all the paperwork involved with lending money?
The paperwork involved with lending money can be tedious. Thankfully, you can outsource this. You will work with a third party called a loan servicer that will handle the loan documents, filing, and money transfer.
Advantages of investing in promissory notes
Passive income
The income from promissory notes is passive. You don’t have to manage tenants or take care of the property. Your returns are typically higher than owning and managing real estate.
Consistent returns
When you invest in income-producing real estate, your returns vary based on maintenance expenses, property taxes, and whether your tenant pays on time. But with notes, your returns are steady. It’s not uncommon to earn more than 10% per year passively with notes.
You can invest in promissory notes through a self-directed IRA
You can invest in promissory notes with money in your retirement accounts. Your high returns from note investing will be protected from taxes if you invest in an IRA.
The key to investing your money in notes with an IRA is finding the right custodian. First, not all IRAs allow this type of investing. Second, you need to do your due diligence to ensure that you are working with the right self-directed custodian who will make investing in notes and collecting payments easy.
Bottom Line
Investing in promissory notes can yield steady above-average returns. You will often find real estate investors needing short-term cash, who will be good customers for this type of opportunity. The investment is passive since the loan servicer will handle all the paperwork for you. You can lend money from self-directed IRAs which will save you money on taxes.