Investing in Mortgage Notes for Passive Income

At The Phoenician League, we advocate the principle of asset allocation. This is about spreading your money – your capital – across several different asset classes according to a personalized model. The purpose here is true asset diversification.

A robust asset portfolio will consist of some combination of the following:

We dedicate a separate page to provide a high-level overview of each of these asset classes. In this entry we’ll cover investing in mortgage notes.

Juicing Monthly Cash Flow by Investing in Mortgage Notes

When we talk about investing in mortgage notes, we’re talking about buying somebody’s mortgage. So when they make their monthly payment, it comes to you. Their payment is your cash flow.

I don’t think this is well known – but anybody can buy mortgages like this. There are no restrictions or accreditation requirements.

And there’s an active secondary market where people buy and sell mortgage notes routinely... if you know where to find it. It’s a relatively small marketplace, however. Because most investors just don’t know that this asset class exists.

Now, we use professional loan servicers to manage our notes portfolio. They send out monthly statements, collect payments, and provide customer service to the property owner—we aren’t involved in any of that. The homeowner has no idea we exist.

Then, just like a property manager, the loan servicer deposits the principal and interest (P&I) portion of the mortgage payment into our bank account each month – keeping a very small portion of it as their fee.

This makes owning mortgage notes about as hands-off as possible. Especially because we don’t have to worry about repairs and maintenance, as we do with real estate.

In a sense, mortgage notes are the other side of the coin. If purchased correctly, investing in mortgage notes comes with considerably less risk as compared to physical properties.

Mortgage notes are also capable of producing stronger cash flow in the current climate. And I’m consistently seeing attractive notes selling in the $10,000 to $40,000 range – making the barrier to entry low.

To give you a feel for it, I’ve seen quite a few notes in this price range recently that produce between $500 and $600 a month in income for the investor.

There are some trade-offs, however. Mortgage notes are not a hard asset with the potential to appreciate in value. Instead, the value of each note diminishes with each monthly payment made.

Along the same lines, mortgage notes come with a fixed term. Once the note is paid off, the cash flow disappears. Thus, we need to be mindful about reinvesting the cash flow we receive.

Tax Synergy: The Secret Sauce

Now, the real magic happens when you are strategic about investing in mortgage notes. If we structure it right, we can implement some advanced tax strategies to offset our income and minimize our taxes.

For example, if we run our operations through an LLC, we can potentially shift a chunk of our personal expenses to the business... making them tax-deductible. In addition, the business could potentially reimburse us for health and wellness expenses, and it could rent out meeting space from us once a month as well – creating major deductions.

That’s a big secret America’s wealthiest families have used for generations now. It’s all about being as tax-efficient as possible.

So if we go about investing in mortgage notes in this way, it doesn’t take long to have thousands of dollars in tax-free cash flow coming to us every single month.

And unlike retirement accounts, there are no restrictions on that money. We can use it for whatever we want.

That’s why I see this approach as the ticket to financial independence. The moment your monthly passive income exceeds your expenses – you’re free. You become work-optional. You can choose to work or not to work... because your investments pay the bills for you.

And here’s the kicker – building up your finances this way doesn’t require you to sell off your assets in retirement. Instead, you can build a legacy that lasts.

That’s something I get excited about. If we’re smart about it, maybe we can eradicate the rat race once and for all.

For a deeper dive on investing in mortgage, notes check out our The Secret of Mortgage Notes strategy session at: https://phoenicianleague.com/mortgagenotes