GOOGLE IS BUYING CAR LOANS? WHY NOT REAL ESTATE NOTES?

 These days, everyone is scrambling to find a decent return on their uninvested capital. In Katy Burne’s WSJ article, Google and many other large corporations are buying securities backed by auto loans and credit card payments. Their return? 2.34%. Not bad compared to US Treasury bonds at 0.3%. But still nothing to be thrilled with. ”We are not trying to hit a home run here,” said Google’s treasurer, Brent Callinicos.

Here’s what 10 Treasuries have been yielding:

Not exactly thrilling. So what other "asset" backed investment should private investors consider? I recommend real estate notes. Especially in a retirement account, notes offer predictable, passive cash flow with a tangible asset protecting your capital...a house. We've been seeing yields from notes in the 9-12% range, and some even have a share of the equity in the property. Notes offer a nice alternative to a cash flow property and can provide true diversification to any type of retirement plan. Do they have the liquidity of a security? No. But they are far more liquid than income properties and offer returns 4-5x that of the bonds Google is purchasing.

Here are a few tips that we recommend when buying real estate notes in a self-directed IRA:

• 70% or less LTV: You want to make sure that the note cost no more than 70% of the value of the property. So if the property is worth $100k, don't spend more than $70k on the note. Why? If there's a default and you have to forclose, you want to make sure there's enough equity to protect your investment.
  
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• Buy 1st Trust Deeds: If protection of your capital is as important as the cash flow it earns, stick to 1st position notes. 2nd position notes are far more risky and in the event the borrower defaults, you don't have the same level of security as a 1st trust deed.
  
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• Get a copy of the Trust Deed: Part of the "escrow" process of buying a note should be filling out a new trust deed that will be filed at the County court house. This trust deed will secure your note investment to the property so make sure you get a copy of the final deed once it has been filed. This usually takes 4-6 weeks after you buy the note.
  
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• Know Thy Borrower: Who is borrowing the money is as important as what the asset is protecting your capital. Always ask for some kind of borrower "profile" so you know who is paying you back.
  
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• Clean Title: Make sure the borrower has clean title to the property securing your note. You should be able to get this from a title company.
  
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• Insurance is Key: Lastly, make sure the property is insured for at least the value of the note. The replacement cost of the property would be even better. And make getting  a copy of the policy each year a condition of the note.
  
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Secure investments which offer strong cash flow is what everyone is seeking these days. Even Google. But don't settle for 2.34%. Look to real estate notes to get both a strong rate of return and protection of your capital.