Where Does the Monthly Income Come From?
For many retirees that is the main question. Their stock portfolio is half of what it was, so they can't spend capital. Michael talks to people all the time that are putting their money into CD's at 1-2% interest, which isn't even keeping up with inflation. Even if inflation is being matched, $1,000,000 in CD's at 2% only pays $20,000 per year! What if you only had $100,000? Is $2,000 a year (about $167/month) really enough to supplement an income?
What if that same $100,000 was lent against a single family, income-producing rental home at 6% annual interest? That would be a $6,000 per year income stream, or $500 per month, 3 times the amount of the CD interest payment.
But What About Security?
After the income stream the question comes up about the current state of the banks and all of the bad loans that have been done and how does someone know that the loan is secured? There are different parts to that answer:
- The property is an INCOME PRODUCING property. Make sure that the real estate investor who borrows the money has a good track record and tenants' rent pays the mortgage. If the tenants stop paying, the real estate investor finds new ones. It is part of the business plan for single family homes.
- The loan is secured by a first-position trust deed. If needed, you can foreclose on the real estate investor. You will then own the property or you can collect the rents yourself.
- You can use a third party escrow service receive the payment from the tenant(s) The escrow service will then send you your payment first, and then the balance to the real estate investor.
- Local real estate investors know property values. The values are based on rents, not on arbitrary market demand. When demand to purchase houses goes down, rent demands go up. Your loan is protected by rents much more than by the property value at any given point in time.
- This is not something new. Do a Google search on private mortgages and see all of the resources on the web. Web sites, books, companies that broker private mortgages.
The Investment That Keeps on Paying
What about comparing a $100,000 cash gift to to heirs vs. leaving a private mortgage behind? How many recipients of that kind of gift would have the good sense and wisdom to invest it? How many would spend it on a depreciating luxury item like a car, boat, or ATV's for the whole family, or an outright expense like a grand vacation?
If a private mortgage of 10, 20, or 30 years survives the lender, the loan and monthly payments goes to the heirs. It is an inheritance that keeps on giving.
What Are Your Thoughts
Have you used a private mortgage? Do you know anyone who has ever lent on a private mortgage? Do you think that they are safe and secure? Any helpful hints for using private mortgages? Let me know.