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The term “passive income” can be a bit confusing. The reality is that no venture is
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Passive. There must be some initial injection of time, energy or money. In fact, to choose a good investment, all you need to do is spend some time doing due diligence. However, the beauty of passive income is that it is possible for the rewards to continue long after the initial effort.
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Typically, the greater the influence or control over an investment, the greater the potential for return. For example, when Warren Buffett invests in a company, he is able to use his resources and intelligence to help it function better and increase profits. He did it again and again on his way to being one of the richest men in the world.
However, many physicians (myself included) simply do not have the opportunity to undertake more active ventures and are still looking for sources of passive income. For this reason, I have always been fascinated by the concept of investing in banknotes. It is one of the most passive forms of investment, and essentially investing in notes takes you from being a borrower to being a bank. Let’s delve a little deeper into this.
Basically, a promissory note (or promissory note as it is often called) is simply a promise to pay. Every time you borrow money and create a document that says you will pay someone back, you create a note. Here are some examples of typical notes:
So, when you are a note holder, you are essentially acting as a bank or lender. The borrower agrees to repay you over a certain period of time with some interest.
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“Asset-backed” means that if someone defaults on a loan, the lender gets something back as a return. The note is “secured”. In the case of a mortgage, the loan is secured by the actual house. If you default on your mortgage, the bank will seize the property and take ownership of it.
On the other hand, if you default on non-asset-backed notes like credit cards, the credit issuer has no legal recourse except to damage your credit score. No collateral is foreclosed or repossessed, but failing to repay can ruin your ability to get other loans.
With federal student loans, if you default on your loan, the government can garnish your earnings, request tax refunds, and even withhold Social Security checks. There may not be any upfront security, but they have ways to get some of your capital back.
With this knowledge, let’s take a look at some ways to invest in banknotes and the benefits they can bring.
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The word “execution” here refers to the fact that the borrower makes consistent payments and the loan is not repaid. The investor can purchase a bill of exchange for a certain amount and start receiving payments. You (the investor) are essentially the bank that holds the mortgage and the borrower pays it back. This can result in a steady stream of passive income for the remaining period.
Many of these notes were created by a “financing seller” where the transaction took place outside the bank, directly between two parties.
Why are the former holders selling these notes at all? Well, they may just want to sell the loan for a sum to “cash out”.
These notes are considered “unenforceable” because the borrower is in default and stopped making payments. This results in debt collection attempts and eventually exclusion.
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Often the holder of these notes may try to sell these notes at a big discount to get some cash back and avoid going through the entire foreclosure process. Investors who are adept at navigating the collection process or know what to do with the underlying property can do quite well with these underperforming notes.
This is a fancy name for a loan secured by an asset, usually real estate. For example, a builder who wants to do a repair and reversal is looking for a loan to buy and build. However, the bank usually does not lend money in this case.
So an investor can then seek collateral for a loan from a hard-core lender who is willing to give them the money, but is placed as the first lien on the home in the event of insolvency. If the buyer defaults on the loan, the lender has rights to that property. They are often given away by individuals or larger companies.
Some real estate crowdfunding sites, such as PeerStreet, can be a way to connect developers looking for hard loans with investors looking to borrow. These loans are secured by a promissory note secured or secured by real estate.
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Peer-to-peer lending Peer-to-peer lending platforms like Lending Club and Prosper make notes from people seeking funds for debt consolidation and shopping. They are tied to investors who are promised a return over a certain period of time based on the specifics of the notes.
Unfortunately, these types of loans are not asset-backed, so other than limiting their credit and feeling guilty about defaulting, there are few consequences for borrowers.
When startups need seed capital, they can get it in the form of business loans, which are essentially promissory notes. If they can’t get a loan through a bank, they may have to get it from private investors.
Business founders often seek loans from friends and family, or often meet with local business angels (where companies pitch ideas) to find lenders. Or again, with the advent of crowdfunding, you can provide seed money in the form of debt through websites such as Microventures, NextSeed, and Syndicate Room.
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Treasury bills are essentially debt securities issued by the US government with fixed interest rates and maturities ranging from one to ten years. The State Treasury pays interest every 6 months.
What is the difference between treasury bills, bank notes and bonds? It really comes down to maturity length:
You can buy them directly from the government through Treasury Direct or through a broker or bank. If you want to see what the performance is like, you can track it through a place like MarketWatch.
You can find good grades in the 4-5% ROI range, and unprofitable grades in a much higher range (5-20 times the return on good grades). When it comes to hard money, it is reasonable to expect a return of 7-20%. For the 10-year T note, the yield is currently around 2.6%.
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I hope you learned something from this primer on investing in bank notes. Once you become a bill holder, you’ll find that returns can certainly be a bit passive. Just sit back and wait for those checks or direct deposits.
However, the difficulty comes from the fact that there are definitely good and bad marks, and figuring out which is which can be tricky. In addition, if there is an opportunity to liquidate or dispose of the banknote in the middle of the term, the question of whether to do so can be quite difficult.
However, those who are well versed in this world know that it is one of the most passive forms of investing. Take your own mortgage, for example: the hardest part for a bank is usually figuring out who to lend to. Now, if you’ve been making payments for a while, they’re probably set up in some sort of automatic payment. So even if there are problems with the house itself and you have to scramble for repairs, all the bank has to do is get the check.
Personally, the notes I invest in are mostly community funded real estate. I do a lot of debt transactions where I borrow money and it comes back to me every month with interest until the end of the term.
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I think if you’re looking for a “passive” source of passive income, consider investing in notes. Personally, I don’t think it should be the dominant investment in your portfolio, but perhaps that’s because I don’t have a full understanding of all this yet. I’ll spend a little more time learning about them, report back, and maybe change my mind.
Disclaimer: The topic presented in this article is general and educational in nature. It does not replace professional advice. Therefore, consult your team of professionals before taking action. Best Guaranteed Approval for Bad Credit Loans in 2022: Get Same Day Cash Loans Without a Credit Check
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In such a situation, the bank may not be able to help you due to lengthy formalities and procedures. Even worse, after submitting all these documents, you may have to wait a few days for your loan to be approved or your application may be rejected altogether.
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Online loan services are recommended as they have much more flexible standards. You don’t even need to go to their office to do this
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