Best Investment – Mortgage Notes or Stock Market?

Among the most important factors to consider when investing is managing the risk, whether dollars are being spent in real estate, stocks, oil, or other commodity; and since investments are made with the expectation of earning a return on the money invested, managing risk is a skill the investor should possess or, if he/she hasn't yet acquired such a skill, refrain from spending large sums of money – especially on Wall Street stocks – until obtaining the appropriate skill level, or alternatively, find “safe,” or less risky investment vehicles.

In his article, 'The Inherent Risks of Investing in the Stock Market,' writer Nick Cruit points out the many variables that could have an impact on the performance of a particular stock ranging from business risk where the investor must rely on company management, interest rate risk, as it relates to bonds, and inflation risk in the sense that rising prices decreases investment value; to market risk because when the market loses value stock portfolios loses value, and regulatory risk whereas a new tax on capital gains impacts return on investment.

In view of this reality, the question a first-time or unseasoned investor must ask him/herself is, “can I effectively navigate the perilous waves of stock market fluctuations?” If the answer is no, there is a strong possibility that available investment dollars belong in a safer haven like real estate – or to be more precise – real estate mortgage notes. Consider for a moment that you recently sold a house, and are now in possession of the proceeds in the amount of Four Hundred Fifty Thousand Dollars ($450,000) from that sale, which you intend to invest in the safest, most reliable manner.

Your investment options are purchasing shares in a number of Wall Street-traded companies, or in a number of real estate mortgage notes, and you have very limited knowledge of both areas. Your first step might be to obtain as much information as you can about these two areas of investment opportunity; and while your research will probably include stock brokers and traders, it will also include mortgage note sellers, real estate professionals and mortgage lending companies to familiarize yourself with procedures on how to get started with both.

It is almost a certainty that what you will find are considerable differences in every aspect of the two areas of investing; from the educational aspect to the acquisition and risk aspect. You will learn that with $450,000 invested in five real estate mortgage notes at an average of 7.5% interest rate for 15 years, will yield a return of $4,171.56 in monthly payments, which can begin as soon as 15 to 35 days after the transaction is closed; and at full maturity of the investment (loan maturity or satisfaction), you would have received your principal back plus $300,880 in interest paid for a total of $750,880. Note that this example only accounts for a 7.5% interest rate. In many cases our investors at The Note Factory are able to see returns of up to 12.5%. 

What's important about the above calculation is not the return on investment, but the fact that you start reaping benefits almost immediately, whereas an investment in stocks will require you to wait a period of time for the stock(s) to appreciate in value – which as we know is not a certainty – before you can think about selling to recapturing some or all of the investment money if  it appreciates. How long will you have to wait is anybody's guess, and whether the value of your stock(s) increases is also anybody's guess; but there is one thing we can all be sure of, and it's this: if the market loses value, the stocks will most assuredly be affected in a negative fashion.

Do you relish the thought of sitting in front of your computer on a daily basis hoping that your poor performing stocks regain value? And when do you decide to sell if the value of your stock(s) is down 30, 40 or 50%? Will you decide to cut your losses and get out with something? Or will you stay the course in hope that the market rebounds? And what if it doesn't? The possibility also exist that none of the above scenarios will occur while you own stocks, and the market is performing (stocks appreciating in value) in a satisfactory manner, thereby allowing you to realize a profit, get your principal back, pay the broker's commission and breathe a sigh of relief. But at what cost? Stress, anxiety, anger, and declining health?

One last point which must be made about this comparison, is the action a real estate note buyer can take when a note-buying deal goes bad due to non-payment of the agreed-upon installments; and that which a stock buyer can take when a stock price crashes for any number of reasons, as mentioned above. In the note buyer's case, s/he can initiate foreclosure proceedings to seize the collateral property and resell it at a high enough price to recover the investment money. In the stock buyer's case, there is no practical suggestions of how to recover lost money except hope for the stock to regain value enough to break even.  

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