Generate Passive Income by Buying Mortgages
How can you be a lender or act like a bank and still have returns in double-digit? Or even better, generate passive income?
You can invest in mortgages, just like Wall Street’s Mortgage Securities but on a smaller scale. Make money in the same method by buying discounted mortgages. What is it? Here is a scenario that explains how it works:
Sample Scenario on How to Generate Passive Income by Buying Mortgages
Mr. & Mrs. Smith find a house that they want to purchase. They both have excellent credit and earn decent incomes, but the Smiths are $5,000 short of their required deposit. Interest rates are at 10%, and they ask the sellers of the property to if they would be willing to take out an interest-only, 8 year mortgage.
What is an interest-only mortgage? It’s when only the interest is paid during the life of the loan and the full amount of the actual loan is paid when the loan matures.
In our scenario, if the home’s purchase price is $100,000, and they need an interest-only mortgage for the $5,000 down payment, then the Smiths would pay $500 each year for 8 years, and in the 8th year, also pay off the full $5,000. In the meantime, they would have two mortgages on their new home.
Whenever property is sold, information regarding the sale of the home is recorded at the country courthouse of the Town or City Hall. The information becomes public record.
The information in these records include:
- Purchase price
- Liens on the property
- Taxes
- Buyer’s and Seller’s names
- Mortgage amount
- Lender Name(s)
Given this information, how do you use it to generate passive income? First, go to the place where the public documents are recorded and look for properties that have a 1st and 2nd mortgage on them. The first mortgage is typically a financial institution, and the second is sometimes an individual.
Gather 15-20 of the second mortgage holder’s names, and research to find their phone numbers. Call them, introduce yourself, and offer to buy the mortgage, at a discount.
Here is a sample script of a conversation:
You: “Hello, Ms. Jones? My name is John Doe. I invest in real estate, and the town public records here in Anytown indicate that you hold a mortgage for $5,000 on the home at 1 Main St. Am I speaking to the right person?
Ms. Jones: “Who are you again, and how do you know about this mortgage?”
You: “I’m a real estate investor, Ms. Jones, and I wanted to buy your mortgage for cash. I purchase this kind of mortgage often, and I just wanted to see if you are interested in selling for cash?”
Ms. Jones: “What do you mean? How does this work?”
You: “I would pay you cash to purchase your mortgage at a discount. I could give you $3,000 for it. Does that interest you?”
Ms. Jones: “Umm, yes. I think I’d consider it.”
You: “Okay, I can draw up a proposal, and we can meet at your lawyer’s office to go over it.”
Important points to consider in this conversation are:
- The amount of your offer should ideally be 60-75% of the loan value to ensure that you make a profit and generate passive income.
- There are two reasons that Ms. Jones would consider selling the mortgage at a discount.
- Managing the payments and collection process for the loan payments has become more of a headache than it’s worth to Ms. Jones.
- A large lump sum of cash is attractive to Ms. Jones.
A 30% possible profit on this situation can be factored as:
Mortgage Amount $5,000
Your Purchase Price $3,000
Remainder of Term 5 years
Interest Rate (original) 10%
Annual Return =$500/$3,000 = 16.7%
Total Interest You’ll Get $2,500
Discount $2,000
Total Profit $4,500
Average Return Annually ($4,500/$3,000) / 5 years = 30%!
Of course, this is an example and the return would depend on the interest and the remaining terms of the loan. But still, it’s a good way to generate passive income!