Investing in debt can provide profitable opportunities for savvy investors. Debt agreements aren’t only the business of lenders and borrowers; options exist to allow outside investors to earn a return on other people's debt or accounts receivable. Popular options for investing in debt include buying bonds, joining peer loan programs and buying tax-lien certificates.
Buy bonds from companies or government entities. Bonds are debt instruments that can be traded before their maturity to reap quick profits. When buying a bond, you will pay the issuer a set amount upfront, usually $1000. The bond issuer will then submit annual interest payments to you, then repay the original amount at the end of the bond's life.
Join a peer micro-loan program as a lender. Online communities, such as prosper.com (see Resources), have sprung up to serve the micro-loan market, allowing individual lenders to extend small loans to other individuals and families. Peer loans can range anywhere from $500 to $25,000 or larger in rare cases. However, loans are often filled by a range of lenders, allowing individual lenders to contribute as little as $25.
Buy accounts receivable from other companies if you operate a small business. Buying other companies' debt, called factoring, can provide steady, long-term income, and factor transactions are generally win-win situations. After purchasing accounts receivable, generally at a discount over the face value of the debts, the original company's debtors will make their payments directly to your company. Conversely, selling your own accounts receivable can help bring in emergency funds in times of trouble.
Sell real estate directly to a buyer, setting up a financing arrangement between the two of you. Offering financing directly to a buyer can be much more risky than asking buyers to pay upfront with mortgage funds, but this type of financing can bring money in consistently over a very long term, often twenty or thirty years. Consult a legal professional when drawing up a direct financing contract.
Buy tax-lien certificates and tax deeds to purchase real estate at deep discounts. Local governments can take title to real estate to cover unpaid tax obligations. When this happens, the government entities are eager to sell the property at nearly any price that will cover the previous owners' tax debt. This provides opportunities for savvy real-estate investors to purchase property at deep discounts. A real Robin Hood of real estate could conceivably buy these deeds and offer to sell the properties back to the original owners at reasonable prices, doing good in the community while earning a profit.
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