After all my raving on the benefits of owning notes, seeing this article may come as a surprise to you. Nothing is perfect. To be fair, there are aspects of note ownership I wish were different. I believe these to be minor items, but they deserve mention.
Number One: Lack of Tax Savings
Current tax code allows for a large amount of deductions and write-offs for depreciation on real estate, especially rental properties. Not so with notes. Note income is taxed as interest income. This means your business can take the necessary write-offs, just like any other business, but you will never reach a scenario where you write off 100 percent of interest income.
However, if you lose money with a note, you can deduct the amount as a loss, which does provide tax savings. It is important to understand that you are only taxed on the interest portion of the borrower’s payment, which is your profit. The principal portion is not profit. It is called “principal payback” and treated as a return of your original amount invested. The best way to create tax savings with notes is to purchase them from inside your self-directed IRA. That is the ultimate tax savings plan.
Number Two: Notes Do Not Appreciate in Value
Unlike real estate, notes do not appreciate over time. While real estate can appreciate, by how much and when is outside your control. Notes, in fact, do the opposite. The value of the note stays almost static, and will go down very slowly over time as the borrower pays down the loan. Not a bad thing really, because you are collecting payments every month and putting that money in your pocket. However, it is important to point out that the value of the investment does go down as the loan is paid down. This is because any potential buyers for the note will be interested in the income stream the note produces.
Number Three: Notes Get Paid Off Eventually
Every now and then, a note you own will suddenly be paid in full. This is a sad day for you, as the income stream is suddenly gone forever. It’s not all bad, however, because you will likely have made tens of thousands of dollars collecting those monthly payments before this happens. Hopefully you reinvested that money buying more notes.
The types of notes we have been discussing carry terms of ten, twenty, or even thirty years, so we are talking about decades before the payments discontinue. That is, unless the borrower pays off the loan by refinancing or selling the property. In either of those two cases, you will receive a large lump sum cash payment.
Notable Capital Fund offers double digit returns for qualified investors. To learn more about passive income opportunities through the Fund, complete the subscriber questionnaire linked here http://notablefund.com/subscribers All information remains confidential.
NOTABLE CAPITAL MANAGEMENT LLC
12600 Hill Country Blvd, Suite R-275
Austin, Texas 78738 USA
Telephone: 512.572.6900
(This article is an excerpt from Joshua N. Andrews Book titled Paper Profits – How to Buy and Profit from Notes a Beginners Guide)
Request a free copy mailed to you by clicking here: http://notablefund.com/paper-profits-book-request