Real Estate Investing vs Stock Market – Part 3

Real Estate Investing vs Stock Market

As a reminder we are revisiting a series of articles written in 2009 at the low of the great recession and what many people were looking at in their stock market accounts.

We have determined that if you started today (in 2009) and earned the average rate of return of 7% on your stock market holdings it would take you a little over 10 years to bring your balance up to where it was in 2007.  At 12% we could shorten that.  If we want to get our values up faster we need to get a better rate of return.  Or conversely invest in a less volatile investment so our numbers do not come crahing down.

Going back to our MAREI meeting from 2009, the speaker gave an example of a Mortgage Note that he helped facilitate.  He buys and sells notes and he came upon a Church who was holding a privately held mortgage note.  The Church had purchased a residential property and sold it owner finance to a nice lady.  Their plan was to buy this property (which was valued around $45k to $50k) and sell it to the lady for $35,000 on an owner financed mortgage note with 10% interest and a 2 year balloon.

Plan worked great, but the lady,  was not able to pay off the note in 2 years.  The church, being a church did not want to foreclose, but they also did not want to hold the note any longer.  Along comes a private investor who also buys notes.  The private investor was able to purchase the note (mortgage) from the church for $25,000.  They worked out with the lady buying the house that she would adjust the note to still owe $35,000 to the new note owner, her payments of around $450 a month would not change, and she was happy to stay in her house.  Over the life of the note while the church had owned the note, they had made$1500, even selling it at $25,000, so the were happy.

Now the new note holder, owned a mortgage that he had spent $25,000 to purchase, that over time he would earn $35,000 back in principle – a $10,000 profit over 30 years.  Plus he was getting 10% interest on $35,000.  If I did my math right, while he was charging 10% interest on $35,000, he was actually earning 14% on the $25,000 he had invested.  Further if you take into account the $10,000 difference between the face value of the note and the purchase price over 30 years, he was getting another 3% interest on that.

My math may be a bit off, but you get the idea.  For a 25,000 investment, this note buyer was earning about 17% on his money.  Divide that into the Rule of 72 and you get 4.23 years for him to double his money.  Private investor was very happy, even if the lady defaulted and he got the house back.  In that case the house was worth about $50,000 and he had only paid $25,000 for it.  So if the lady never made a payment and he took back the house next month, and turned around and sold it for $50,000, he would have doubled his money in 2 months, an even better deal.

So, with a little knowledge on buying mortgage notes you could invest your money and double it really fast.  If you don’t have the time to learn mortgage notes, you could talk to a person who does invest in notes and they might be able to find a note that would work nicely for you. We have quite a few people at the MAREI meetings who invest in notes, so seek them out.

Now we want to add one more piece to this note buying puzzle.  The money you have today in the stock market what kind of money is it?  Savings, 401k, IRA, Roth IRA?  If you are like many people across the country, this stock market money is in some type of savings account.

So let’s say you have your money in an IRA, you could roll that IRA money from where it now sits and put it into a self directed account with a company that will allow you to invest in things like mortgage notes or rental properties.  Roll all or part of your money over to a self directed account.  Then you could invest your retirment funds in your IRA in a note.

So far so good, you follow me?  Take your $100,000 in your IRA account at say Fidelity and roll $25,000 over to a Self Directed IRA Custodian.  Find a deal like the one above and buy a mortgage note and earn about 17% return on your money.  But now your return is even better than 17%.  Why . . . because it is in an IRA, and the IRA is earning 17%, not YOU!

So now you don’t have to pay taxes on that 17% now.  So if it is a regular IRA that is created with before tax dollars, you don’t pay taxes on the profit now, but when you draw it out at retirement.  So you will make an even better return on 17% because now you are saving on taxes.  If your IRA is a Roth IRA that is created with after tax dollars, then you never have to pay taxes on that 17%, saving your 15% to 35% in taxes.  I’m not a CPA and don’t know your tax bracket, so not sure your exact savings, but you get the idea.

 

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