Five Reasons I Am Addicted To Discounted Performing 2nd Mortgage Notes

Passive income - Mortgage notes are truly passive income. For performing notes, there is very little work that needs to be done. Cash a check and monitor the status of the first mortgage.

Attractive Returns - For notes backed by a mortgage in first position, return are normally in the 5 to 12% range. However for second position notes, returns of 15% to 25% are not uncommon. Quick example. If an investor purchases a 2nd mortgage note with a face interest of 10% at a 50% discount, the yield on this note would be 20%.

Refinance - If a homeowner decides to refinance, returns could go through the roof. In the example above, if the investor purchases the note at a 50% discount and the homeowner refinances at the end of the year the return now goes up to 120%. Twenty percent coming from the monthly cash flow and the rest coming from the difference between the current payoff and the original purchase price of the note.

Simple Servicing and Management - It is highly recommended to place all your notes with a servicer. Costs for servicing a performing notes generally range from $15 to $25 per month per note. For this price most servicers will send out monthly statements and other required documents

Diversification - There is currently a high degree of correlation in stocks even across borders. However, in notes the correlation between borrowers is fairly low. If a note stops performing in Kentucky, the chances that a note in California stops performing at the same time are pretty low.