This is a guest post by Deets LaMoss at freedom595.com. His blog documents the methods and strategies he is using to generate passive income to replace his salary and become financially free by November 15, 2017.
One of the core investments that I use in my passive income machine are trust deeds (aka notes or mortgages). If this is a new topic to you, then please read on as I will share the mechanics of how this works and why I like them.
A trust deed is like mailbox money
Trust deeds or mortgages are one of the best passive income investments I have found. These short term loans, secured by real property, are made to contractor/investors who purchase undervalued homes in desirable areas, rehab them, and then quickly resell them. By acting as the private lender or “banker” you get to participate in the real estate market and earn high returns without worrying about tenants who don’t pay their rent or fixing their leaky toilets. Also, it is really cool to get checks in the mail every month for doing nothing!
How they work
These contractor/investors do not have time to wait on a bank to approve and fund a loan. When they find a property they have to move quickly before someone else gets it. That is why they use private lenders who can fund the project in less than two weeks. They pay a higher interest rate for the convenience of this service because they are borrowing the money for a short period of time (6-18 months) and their anticipated resale price will offset the rehab costs and interest payments yet still produce a handsome profit.
One of the things I really like about this business is the transparency. I work with a team of licensed brokers, attorneys, and title and escrow companies to make sure the paper work is complete and everyone is protected. It’s clean, easy, and secured by real estate.
The other thing I really like is the fact that everybody wins. The borrower is able to close more deals and make more profit. The private lender makes a spread on the interest and sometimes a share of the borrower’s profit. The trust deed investor earns excellent interest (8-10%) and sometimes a back end profit. The service providers (broker, loan servicing, escrow, title, etc.) all benefit from the transaction too. It’s a great business model!