Learn How To Start Investing In Real Estate
Learn How To Start Investing In Real Estate

The World’s Most Underrated Retirement Strategy

Written by JD Esajian

Looking for a retirement strategy that provides a bigger return than the stock market? Feel like there’s a better retirement fund investment strategy out there than dumping your money into a 401(k) and hoping the returns provide you the financial security you need when it’s time to stop working?

Are you searching for the best retirement investment strategy that doesn’t require constant maintenance, but gives you a healthy enough return for you to meet your financial goals?

Well, perhaps you should consider discounted notes. This powerful (often overlooked) investment strategy might just be your path to retirement savings, and the most underrated retirement strategy imaginable.

Not sure what a discounted note is? Or how it fits in with your self-directed retirement investing plans? Pull up a chair because we’re about to discuss this powerful, yet simple, wealth-building strategy that, chances are, you’ve never heard of.

The Most Underrated Retirement Strategy In The World?

Best retirement investment strategy

What’s A Discount Note?

Before we delve into discount notes, we need to cover what a note actually is. A note is a debt security that requires repayment of a loan at a particular interest rate and particular time period. A real estate note, which is what we’re interested in, is a debt obligation backed by real estate.

For example, if someone agrees to purchase a home for $120,000, but they are only able to come up with a $20,000 down payment and need to finance the rest, they will acquire a “note” of $100,000, issued by the lender.

If the note is issued at a 10% interest rate, over 30 years, this means the note would pay the deed-holder — in this case, the bank — 360 payments of $877.57 over the 30-year course of the note.

A discounted note, therefore, would be a note purchased at a sum lower than the total owed by the note-holder. (In the above example, this would mean purchasing the $100,000 note at a “discount,” such as $85,000.)

As the purchaser of a discount note, you become the “new” bank; all payments now come to you. This lets you enjoy a non-traditional return — usually much higher than the standard 8% — using the traditional method of real estate to back your investment.

How Discount Notes Generate Income

Discount notes are powerful because they serve as a passive income-generating asset  if you purchase a note, you are the party receiving payments without having to own, manage, or sell a single square foot of real estate. Depending on your purchase price, you can often see a return of 10-12 percent on your investment with discount notes.

Best of all, you can manage your risk in whatever way you see fit. You can buy a portion of a note, such as 50% or even as low as 10%, or you could buy a fixed time period of a note, such as the first five years of a note.

And your risk is reduced further because if a note-holder defaults on their payment, and you are in first position of the note, you can foreclose on the property. And because you purchased the note at a suitable discount, you should have equity built-in to the asset.

Discount Notes & Your Retirement

The real power of discount notes as a retirement strategy comes from the fact that you can purchase notes directly from your retirement account, such as with a self-directed IRA for real estate.

And then monthly note payments you receive — and interest earned from those payments — can stay in your self-directed IRA real estate investment, tax free.

Read that again: you can buy the note using tax-free dollars and earn tax-free proceeds. Powerful, powerful stuff.

Now, of course, you need to acquaint yourself with self-directed IRA real estate rules to ensure you meet the required qualifications to enjoy this tax savings. But the ability to create streams of passive income, tax free, makes discount notes a powerful (and often under-appreciated) retirement investment strategy.

How To Buy Discount Notes

As with any other form of investing, it’s generally a good idea to partner up with an experienced individual at first — in this case it would be a brokerage who specializes in discount notes — so you can learn the ins and outs of this particular investing strategy.

Though once set up discount notes can be a “set it and forget it” venture, there are quite a few foundational elements you need to add to your entrepreneurial toolbox. This includes things like understanding how the closing process works, discovering what goes into underwriting, and knowing what happens when a note-holder doesn’t make a payment.

But if you’re able to find a reputable discount note partner, especially at first, and master the traits that successful discount note investors possess, you should be able to turn relatively modest amounts of capital into cash-generating sources of income.

The Deep End Of The Pool

There isn’t much of a “secret sauce” to discount note investing, you buy a note at a low enough price so you can see appreciable returns over time. Unfortunately, as with many aspects of life, buying discount notes as a retirement strategy may be simple, but it is not easy.

The key is to learn what kinds of discount notes represent a good risk and which do not. This often requires in-depth market knowledge of an area. (You don’t want to be stuck with an asset you can’t turn around and sell.)

But if you’re able to boost your discount note knowledge — and finance your investing through sound, tax-free sources — you might find this simple retirement investment strategy is the most powerful wealth-builder of all.