Practically everyone, investor or not, is in the note business. Most people though are just on the wrong side of it. Nearly everyone owns a mortgage, or has a car loan, student loans, or credit card debt and they\u2019re all on the \u201cborrower side\u201d of the note business, but even sophisticated investors often don\u2019t fully understand what goes into acquiring, managing, and liquidating the kinds of debt we all have. Now when I talk about the \u201cnote business\u201d, I specifically mean my specialty, which is Real Estate Note Investing.<\/p>\n
So why should<\/i> a real estate investor understand the \u201cbusiness\u201d side of the note business? Besides cashing a check instead of writing one, here are what I think are the top five reasons\u2026<\/p>\nNote Investing Advantage #1 Collateral \u2013<\/h2>\n
Owning a secured lien tied to property, especially with equity, involves little or moderate risk mainly because you can foreclose on the property and recoup your investment. If it was an unsecured lien, you can also sue on the note and chase the borrower instead of the property. Now unsecured could be seen as more risky, but you also pay a lot less for them. \u00a0Unlike an eviction, in a default of a property with equity you\u2019ll recover missed payments, late fees, attorney fees, and corporate advances at some future date. Collateral could also be considered in the form of residential, commercial, mobile homes, or a construction or rehab project. Junior liens with no equity or low equity are also often times viable because you have a secured lien with \u201cemotional equity.\u201d<\/p>\n
Notes and mortgages usually offer comparable returns to hard Real Estate Investing<\/a> after factoring in management and maintenance. Non-performing notes or notes bought at a discount can even exceed today\u2019s Private Money mortgage yields that can range from 12%-18% plus points. So just like Real Estate, you make more money when you buy and you can make even MORE money when you rehab the note (just like rehabbing the property). And lets not forget, there\u2019s a lot less competition when you\u2019re a \u201clien-lord\u201d versus a landlord<\/a> because other than large hedge funds there are fewer individuals working today in the note space.<\/p>\n Many times owning a note can give you low cost positioning into a deal. In a private note deal with a 1st<\/sup> mortgage, your maximum loan amount is typically about 65% of ARV (after repair value) meaning the most you\u2019re getting the house for if you take the property back through foreclosure is 65 cents on the dollar. Even owning a 2nd mortgage can create other opportunities. For instance, owning a 2nd mortgage that was purchased at a lower price point than a typical 1st lien may give you the opportunity to buy out the 1st lien at a discount. Another profitable example when owning the 2nd<\/sup> lien is where you could just reinstate the 1st mortgage, foreclose, and take over the property (with a Sheriff\u2019s Deed) \u201csubject-to\u201d the 1st mortgage and just continue to make payments on the 1st.<\/p>\n Speaking from experience, you can easily manage more loans than properties or rehabs (e.g. it\u2019s easier to rehab 200 notes than rehab 200 properties). You can manage your note portfolio from your phone and computer, never having to leave your house! A loan servicer is also much more cost efficient than a property manager. Servicers are approximately $25 set up fee, and $15\/month no matter how high the monthly mortgage payment (whether it\u2019s $300 or a $3000 payment) as opposed to a property manager who wants 7% to 10% of gross rent. There\u2019s little to no management once a note is re-performing, especially with a servicer in place who sends late fee notices, 1098s to the borrower, and they also do the accounting for both you and the borrower. It\u2019s rare to deal with maintenance, tenants, and contractors. There\u2019s usually less responsibility, for example Wells Fargo doesn\u2019t usually do plumbing repairs. You are also dealing with a lot less vacancies because it\u2019s a homeowner mentality versus a tenant\u2019s. A homeowner generally has more \u201csweat equity\u201d or \u201cemotional equity\u201d than a tenant.<\/p>\n \u201cAlmost anything you can do with a house you can do with a note.\u201d You can flip or wholesale a note, just like a house. You can refinance the borrower especially once there is a pay history or through credit repair. You can also sell a note whether it\u2019s performing or non-performing. You can even \u201crehab the note\u201d which is to take a non-performing note and make it re-performing. And another way that isn\u2019t talked about nearly enough is you can borrow against the note, also known as a Collateral Assignment of Note & Mortgage. This is where you\u2019re re-performing note and mortgage is used as collateral for another private loan with an investor.<\/p>\n So these are just a few examples of why I think the note business is so advantageous right now and I\u2019m only scratching the surface. I hope I\u2019ve gotten you thinking more about the \u201cother side\u201d of the note business. It really can be a great business in itself or a powerful means of supporting the Real Estate investment business you already have. Leave a comment and let me know if you have any questions, I\u2019m looking forward to elaborating on all of these advantages in articles to come!<\/p>\nNote Investing Advantage #3 Opportunities \u2013<\/h2>\n
Note Investing Advantage #4 Volume and Control \u2013<\/h2>\n
Note Investing Advantage #5 Versatility –<\/h2>\n