Discounted notes vs x% 401K company match

house_cashI saw a post about someone that seems to have defied the averages and made over 12% on their 401K. Part of their follow up was asking “what product do you offer competes with my company matching the first x%?”

Well I can think of one. Discounted notes. It may be tricky to see because its kinda of opposite. But in the end, the net effect is the same.

With a company match, some amount, like the first 6% that goes in is matched by your company. That is free money and money people jump at the opportunity. With a discounted note, you are buying a loan, say $100,000 for a discount like $70,000. You will receive payments on that $100,000 debt. And at some likely point in the future, you will receive a pay off for that loan. Since you only paid $70,000, there will be $30,000 of profit included.

So just like your company giving you pure profit up front, you will receive pure profit. It just happens on the back end. What’s the downside risk? There is always downside risk.

A 401K with a company match typically only offers mutual funds. Most of them average 2% annual fees. If you build up $1 million, we are talking $20,000/year in fees. Did you catch the part where that is every year? Enter retirement that lasts twenty years, and you are talking $400,000 in fees. Yikes! Who knows? Maybe you’ll do better.

With notes, some of the risk is that the payer will stop paying. You have to foreclose, claim the property that is backing the note, fix it up, put it on the market, and sell it. Then you get to collect whatever money is left over. It might be more or less than your $70,000 investment after all fees have been paid. That is why finding the right note is critical, and why shopping for them by yourself can be hazardous to your wealth building health. If you don’t have a 1st position note, then your not first in line when a foreclosure happens.

If it’s not obvious, there is a lot more entangled details you have to manage when it comes to notes vs. 401K mutual funds. Which is probably why you stand to earn much better money with a discounted note. And why its worth every nickel to find the right expert to help shop for the right note to buy, in order to mitigate the risk of ever having to foreclose.

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