jwithrow, Author at The Phoenician League

Discover the Income Power of Mortgage Notes

Mortgage notes are a low-hassle vehicle for generating solid returns and extra monthly income power. This asset class remains something of a secret that Wall Street keeps hidden from regular investors, but there are no restrictions or barriers to entry.

As last week’s real-world story of Gateway Savings & Loan demonstrated, mortgage notes play a critical behind-the-scenes role within the financial system.

The fact is, investors help make 30-year fixed-rate mortgages possible. We wouldn’t be able to buy a home with a 30-year fixed rate unless investors were willing to buy our mortgage.

And given that interest rates have risen substantially in recent years, investing in mortgage notes offers strong returns today – typically between 7 and 18% a year annualized.

I know we’ve only hit the highlights in our series over the past week, but I wanted to put this asset class on your radar. If the prospect of earning steady, asset-backed income power with creative tax strategies piqued your interest, The Phoenician League is hosting a free strategy session tonight to go much deeper on the subject.

We’re going to walk through every facet of mortgage note investing—from the basics to advanced tactics. And we’ll walk through a live example of how to analyze an available mortgage note in real-time. We’ll talk extensively about due diligence and risk management as well.

Unlocking Tax-Free Passive Income

In the good old days of American politics, there always seemed to be a push for presidential candidates to release their tax returns.

The media would put out the notion that it was somehow noble for a candidate to pay a lot in taxes. And that’s why the candidates who were savvy businessmen never went along with it. Then the media would speculate about why they refused to show the American people their tax return, seeking to paint them in a bad light.

Ahh, the good old days.

That’s back when presidential debates revolved around meaningless political topics and good old-fashioned mudslinging… rather than assassination attempts and arguments over who’s a he, who’s a she, and who’s an it.

Nostalgia aside, the reason certain presidential candidates didn’t release their tax returns was that they weren’t paying any taxes. Or if they were, their tax rate was minuscule.

The mainstream belief is that the tax code is all about raising revenue for the government to fund civil services. But that’s just not the case.

The federal tax code consists of over 70,000 pages. Yet, less than five percent of those pages are about paying taxes. In other words, less than five percent of the US tax code pertains to collecting revenue for the government.

The other 95 percent of the code is all about how to avoid paying the taxes that the first five percent says we owe. That’s the whole point underlying such a complex code.

So the US tax code is actually about how not to pay taxes. It was written to show “those in the know” how to legally avoid paying taxes. But regular folks can follow it too. We just have to know what the code says.

Now, the Internal Revenue Service (IRS) classifies income in different ways. When it comes to mortgage notes, we need to ensure that the income they generate for us is considered ‘active’ income per the IRS definition.

The easiest way to accomplish this is to invest in mortgage notes through an LLC established specifically to buy mortgages. This unlocks the tax code and allows us to shift a lot of personal expenses to the business… and create some phantom expenses to boot.

Crafting Financial Freedom

We talked quite a bit last week about the secret world of mortgage notes as an alternative investment class for financial freedom.

The power of mortgage note investing can be unlocked if we commit to building a portfolio of mortgages – just like an institutional investor would. This is how we can craft true financial freedom.

When we left off last week, we profiled a mortgage note listing that will generate $605 a month in extra income for whoever invests in it.

Starting there, let’s assume that we commit to buying a new mortgage note each year with similar characteristics to build out a portfolio. Obviously the numbers will be a little different for each note, but let’s assume that we can get another $605 in monthly cash flow for each note that we acquire. We’ll call this our financial freedom plan.

Here are the numbers if we simply add one mortgage to our portfolio each year:

Again, the numbers won’t be quite this clean in practice. But investing in a new mortgage note like the one we profiled each year can create thousands of dollars in extra monthly income for us in just a few years’ time.

And this projection may be overly conservative… because it assumes that we aren’t reinvesting our profits. So what if we took this extra income and committed to adding a second note to our portfolio each year?

Mailbox Money from North Carolina

Here’s a mortgage note listing that hit the market recently.

At first glance, this looks like a charming home in a nice neighborhood in Plymouth, NC. It’s a small town on the banks of the Albemarle Sound in eastern North Carolina – about an hour and twenty minutes away from the Outer Banks.

The mortgage balance is $57,000 and there are 173 payments remaining. That’s over 14 years. The interest rate is 9.5%, and the monthly P&I payment is $605 a month. That would become our cash flow if we made this investment.

The seller listed this note for $45,000. That’s the ask price… but it is negotiable.

The seller’s estimate suggests that this home is worth $125,000, which is more than twice the mortgage balance. That’s good. But we would do our own due diligence to verify the home’s value – because it would become our collateral if we were to invest in this mortgage.

What’s great about this asset class is that we have all the numbers up front. That makes it easy to analyze from an investment perspective.

Given the monthly payment of $605 and the remaining term of 173 months, we can quickly calculate that we will receive $104,665 in payments over the life of this note. That’s mailbox money coming to us from North Carolina.

Mortgage Notes – Breaking Down the Barriers

I mentioned yesterday that you don’t need any specialized knowledge to invest in mortgage notes. And that’s because we utilize professional loan servicing companies to manage the mortgages that we invest in.

These companies are akin to property management firms for real estate investors. They send out monthly statements, collect the mortgage payment, and provide ongoing customer service for homeowners.

That makes investing in mortgage notes completely passive – investors don’t need to do anything other than communicate with the loan servicer periodically. The homeowner has no idea that we exist.

I suspect many of us have received a letter in the mail at some point notifying us that our mortgage had been transferred.

That letter provided us with information on how we should make our mortgage payment going forward, and it gave us a website and phone number we could call for customer service.

The letter was likely an indication that a new investor had bought our mortgage. Except it didn’t provide us with many details on that matter… it simply gave us the information we needed to manage our mortgage going forward.

So, investors don’t need any specialized knowledge to invest in mortgage notes. We simply let the professionals do the work for us.

The Secret World of Mortgage Note Investing

As I’m sure we know well, when a homeowner takes out a mortgage to buy a property, the lender issues a promissory note that outlines all the terms of the loan.

That note is an asset. It gives the lender the right to receive the monthly mortgage payments that the homeowner makes, and it spells out the lender’s security interest in the underlying home as collateral should the homeowner default on their obligations.

However, lending institutions today only keep a small fraction of the mortgages they originate on their own balance sheet. That’s because holding mortgages reduces the capital they have available to make new loans, which is their core business.

For this reason, lenders sell most of the mortgages they create shortly after origination. And who do they sell these mortgages to?

Well, 80% of the time they package a group of mortgages together into mortgage-backed securities through a process called securitization. But the other 20% of the time, they sell each individual mortgage to investors.

Most often those investors are insurance companies, pension funds, and hedge funds. They tend to buy large blocks of mortgages in one sitting. But here’s the thing – there are no accreditation requirements. And that means individual investors can also buy mortgages at will. Anyone can engage in mortgage note investing.

Of course, most investors don’t realize that this is an option. And the prospect of buying a mortgage seems daunting. It sounds like it requires a lot of work and specialized knowledge. Not to mention the cost – doesn’t it require deep pockets to buy somebody’s mortgage?

From Bank Runs to Cash Flow – A Flashback to the 1980s

It was Friday afternoon and the financial markets had just closed for the day… but the mood was tense in the boardroom of Gateway Savings & Loan.

President I. Owen Funderburg knew he needed to steel his resolve, but he couldn’t help pacing nervously. He needed to find an answer to an unexpected problem.

The year was 1980, and the Federal Reserve (the Fed) had just raised interest rates again – sending shockwaves through the small thrift’s once-steady world.

Gateway’s ledger was bleeding red, and the phone lines buzzed with worried depositors demanding to withdraw their money. The threat of a bank run was imminent.

Funderburg understood the problem very well.

Gateway Savings & Loan had built a large portfolio of fixed-rate mortgages throughout the 1970s – when interest rates were more reasonable.

But with Mr. Volcker at the Fed hellbent on whipping inflation by raising interest rates dramatically, the bank’s short-term deposit costs now exceeded its loan yields… making its mortgage portfolio a millstone around Funderburg’s neck.

Bulletproof Money Session Three Summary

This session concludes the three-day financial workshop, shifting from building a secure financial foundation to creating financial independence with passive income and advanced tax strategies. It offers detailed, actionable steps, practical examples, and clear distinctions between real estate and mortgage note investing—all designed to accelerate your journey to consistent, tax-advantaged income.

1. Transition: From Security to Independence

Recap: Previous sessions established your cash warehouse (liquid reserves), gold and Bitcoin (reserve assets), and a permanent portfolio.
The next phase is generating passive income that can fully or partially cover your living expenses, freeing you from the need to sell investments or rely on the “retirement” model.
Key Principle: Don’t wait for a future retirement date—create multiple income streams now that let you “retire” at any age (or simply enjoy greater freedom).

Bulletproof Money Session Two Summary

This session dives into the actionable tactics for building genuine financial security, modeled on the robust strategies of the world’s best long-term business—property & casualty insurance. The hands-on workshop covers what assets to prioritize, how to structure your asset allocation, and step-by-step ideas for immediately enhancing your household’s financial security and independence.

1. Foundation: Lessons from the World’s Best Business

The Model:
The oldest, most resilient business—property & casualty insurance companies—have survived centuries and countless crises. Their “secret”?
- They receive money up front (premiums), forecast their liabilities, and then strategically invest the float again and again in a diversified, long-term portfolio.
- These investments compound their wealth and income, allowing them to grow stronger during both good times and bad.
Takeaway:
Households can mimic the insurance business for lifelong security: Cover fixed commitments, invest the “float” first, and harness compounding.

2. Strategic Wealth Diagram—The Bulletproof Structure

Diagram Walkthrough:
- Income/Nest Egg flows into a series of “buckets”:
  - Cash Warehouse
    Keep reserves for emergencies/opportunities. Consider money market accounts (for liquidity) or, preferably, max-funded whole life insurance (“IBC” policies) for tax-efficient, liquid compounding.
  - Gold Reserve & Bitcoin Holdings
    These form the “reserve assets”—your personal hedge against inflation and economic shocks. Both are savings, not speculations, and function as the foundation for preserving purchasing power.
  - Permanent Portfolio/Equities
    A small (typically 8–20%) allocation to high-quality, dividend-producing stocks, selected for long-term themes—not quick trades.
  - Investment Real Estate & Mortgage Notes
    Vehicles for future passive income (to be discussed in depth in Day 3).
  - Alternative Investments
    Optional: things like Timberland, collectibles, new asset classes. Add for extra diversity, not as your core foundation.
- Monetary Flow:
  - Consistently direct new surplus cash into these “buckets” in order of priority, just like an insurer invests surplus before discretionary spending.
  - As invested assets spin off returns and income, re-cycle those for further compounding.

Bulletproof Money Session One Summary

This session is the introduction to the “Bulletproof Money Three Day Challenge” with Joe Withrow, focused on building true financial security and rethinking conventional retirement planning in the new economic era post-2022. The session blends personal experience, economic history, and practical challenges, laying the foundation for actionable strategies in the subsequent days.

1. Setting the Stage

Personal Connection:
Joe broadcasts from his off-grid, solar-powered office in Virginia, emphasizing authenticity and transparency.
Event Structure:
Three interactive workshop sessions: ~45-60 minutes teaching, followed by live Q&A (no scripting).
Emphasis is on actionable advice, not sales pitches.

2. The Big Economic Shift (2022)

Historical Turning Points:
Key monetary events: 1971 (Nixon shock/gold standard removal), 1980s-2022 (falling interest rates), 2008 (zero interest rate policy, Bernanke era), LIBOR scandals, and—most crucially—the full rollout of SOFR (Secured Overnight Financing Rate) in 2022.
2022 as a Breaking Point:
- SOFR replaced LIBOR, ending an era of easy central bank manipulation of long-term interest rates.
- Long-term rates are now market-driven, influenced by inflation, government fiscal health, and global trust.