Recently I was having a discussion with a friend of mine discussing some of the different ways to create wealth not only from real estate but other forms of investing that can give huge returns. We talked about the usual ways of making money buying real estate and we also talked about other ways of creating income without having to do any physical work for the money. Of course when you are a real estate investor your first thought is usually either about, buying foreclosure properties, wholesaling properties, fixing and selling houses at retail prices, and also buying long term income properties.
One subject I have never talked about before that I think is an important part of every real estate investors portfolio of investing opportunities is to also own paper assets for income. From this point forward we will refer to paper assets simply as "Paper". So what are paper assets? Paper assets come in many different forms. Some different paper assets come in the form of property tax certificates, land contract paper, contract for deed paper and promissory notes secured by a mortgage or a deed of trust paper. It is my belief that every real estate investor should be diversified and have several different income streams to help them build the wealth they desire.
Paper assets in the form of a promissory note are created when someone borrows money to buy something. The promissory note signed by the borrower is usually accompanied by a mortgage or a deed of trust that gives the lender security for the repayment of the loan. A land contract and a contract for deed are forms of financing real estate that allow the buyer to make payments to the seller over an extended period of time. Any time a buyer finances the purchase of an item they buy whether it is a house, a car, jewelry, furniture, jet skis, snowmobiles, airplanes or anything, the buyer has to make payments over an extended period of time. The reason I am writing this article about paper assets is because the friend I was having the conversation with was telling me that a friend of theirs was investing in cemetery lot paper.
This is paper that was generated when people who were buying a cemetery plot with a plan to be buried someday have to pay for the plot in monthly installments over an extended period of time. I had never heard or thought about buying cemetery lot paper but it's just another part of the investing business most of us never think about that can help us generate large sums of money over time. Regardless what type of paper you decide to buy, the only bad thing I can think of about owning paper assets is someday the loans will be completely paid off and the payments will end. But I guess if that is a worry of yours you can simply buy more "performing notes" or "non-performing notes," whichever you feel is the right investment for you.
Let me explain why I think investors should own paper assets as part of their estate and wealth building plan. First of all it is an income stream. The paper assets you acquire will have a payment due from the borrower every month and most paper includes interest of some kind. These income streams can be purchased from people or businesses that sold an item and agreed to allow the buyer to pay for the item over time. Once the promissory note has been created and signed, many times the investors or business owners want to get their money back as soon as possible without having to wait the full term of the agreed payback period. When this is the case, the person who is owed the money will sell the promissory notes to investors who are willing to wait and accept monthly payments over the original payback term of the promissory note.
A smart investor will want to purchase the promissory notes for less than what is actually owed. This is called a discount. This discount increases the investors return on investment also known as their “Yield,” and the interest rate of the promissory note also adds to the investor’s rate of return.
I will continue the remaining portion of this article next month.