Hello Page,
Of course, everything I write there is just my opinion and works best for my particular situation and comfort level.
Therefore, I am not saying any other approach is right or wrong; it’s just one of the many techniques I use to buy notes with a pension fund for tax-free growth and with draw.
My approach is always been work on a individual case-by-case basis.
The reason is, I only do business with decision-makers. In other words, the Note Seller must be the person receiving the payments on the note for sale.
Another reason I buy discounted notes on a case-by-case basis instead of "Pooling" my capitl is I like to remain in total control my money.
I refuse to “pool” my pension fund capital with other investors, regardless of how well I know them, how smart they are or trust them.
As I would then be giving up control of my pension fund capital to someone else and in my opinion, that is bad strategy.
Although, I do by partial interest in notes, which has worked very well for me in the past.
The following example is a “Tail End” partial note purchase.
The way I’ve done this is; I find a note for sale, offer to buy 100% of the notes remaining payments.
Then I broker a portion of the note to a sophisticated institutional investor and I place the "Tail End" of the remaining payments in my pension fund for tax-free growth.
For example, and keep in mind I’m making up figures for example only.
Let’s say I find a note for sale with 240 payments remaining and the note seller accepts my offer to buy all the remaining 240 payments at a discount.
Giving me, the potential to earn $1700 as a note broker fee on the sale of that note to my institutional investor.
Yet, instead of selling all 240 payments to my institutional note investor for my $1700 note broker fee, I sell 200 payments to my institutional investor and give up $700 of my broker fee in exchange for, the right to receive the remaining 40 payments.
At closing, my pension fund takes assignment of the remaining 40 payments (tail end) via Partial Purchase Agreement with the institutional note investor.
The assignment and partial purchase agreement are recorded at the county seat where the property is located and protects my remaining interest in the note in the event of default or early payoff.
Yes, there are risks, you need to be sure your investor will work with you in the event the note goes in default and you have enough the capital in your IRA to fund the foreclose subject to your investors remaining interest.
I found this note brokering technique to be an excellent way to direct profits to a tax-deferred or better yet, tax-free account (Roth) with minimal investment of cash from my pension fund.
The last tail End note transaction I gave up approximately $700 in broker fee, forgot all about it and then…
About seven years later when the payor refinanced the loan, I received a call from my institutional investor asking me where to mail my large (large to me anyhow) pay off check.
My only regret is I did not do this on every transaction when I brokered notes to my institutional investor these past 20 some years of buying notes and mortgages.
Yet in this example I embarrassingly need to admit that I directed the profits from my partial note purchase to a NON-tax-free account. Yes, shame on me… Now if only I could practice what I preach! ha ha
Then again, there’s nothing like keeping out from under the thumb of Uncle Sam and the IRS out of your transactions, legally, ethically and creatively.
Page, work the numbers on an example like this and you'll find that the yield is phenomenal as well as your cash-on-cash return. And that’s not even including compounding your profits tax free.
Let me know if any questions,
Kent
PS. I'll post a real estate idea tomorrow and, if you like this post click the VOTE button