La Puente, CA · Member since 2015 · 51 posts · 9 votes
Buy and hold multifamily residential property vs. note investing vs. REITs, Pro vs. Con?
One podcast I heared Joshua Dorkin mention he was interested in shifting from buy and hold multifamily residential, to note investing. The podcast on notes got me thinking about yields and risk. I may be comparing apples to oranges to bannas as note investing has a commercial property aspect that multi family residential does not. There's also tax benefits to actually owning property, whereas notes or REITs would be considered a capital gain investment?
There is one issue that I rarely see addressed in the discussions of buy and hold vs notes. Assuming that you (as the landlord/owner) maintain the asset, your cash flow never stops. In very SHARP contrast, notes "end". (mature/pay off/ however you want to term the event)
This can be managed, but the point must be addressed. To address this quite simply, an investor can roll a portion of note payments received into new/more notes.
In contrast, if you buy and hold, and have X number of doors all paid off, with reserves in place, and great PM, the checks never stop.......ever...... Obviously, this is a gross over simplification, but the point stands. Buy and Hold "never ends". Notes "end".
This is only important, I guess, if an investor desires to build "legacy wealth" for their family. But I thought I'd just make sure that the required "replenishment" of notes is built into everyone's plans.
I am in the process of doing this exact comparison. I will be following this closely. For me it seams to be best as a mixture depending on the local markets I am looking at investing in. Some markets are better for notes then holding and vice versa. But again I am still in the comparison/ research stages. Would love to know what you learn. Maybe we can compare notes ( I have a spread sheet I am working on to compare actual returns).
@Account Closed I like your idea of mixing both an dI may do that down the road. Reach out if you gentlemen have anymore questions. Here is a snippet for a BP article:
I invest in notes and like the lack of liability, repair expense, and headache. When is the last time you called your bank to fix your hot water tank, or unclog your toilet? Repairs and cap ex expense are often understated when taking into account the long term expenses and income associated with rentals. Investing in notes is playing the banks game, best business model I know. Having a mix of both is my strategy for great cash flow. Also notes are more ideal for a self directed retirement account due to the lack of expense and less complication with checkbook control, etc. I would rather grow my retirement with a steady 8% - 12% yield secured by real estate than any other strategy.
When you start buying and owning larger pools or portfolios of assets like I do, you will end up with basically three categories of assets. You'll have reperforming notes that provide cash flow on a regular basis without the headaches of toilet and tenants. You'll end up with REO's through either deed in lieu or foreclosing that you can choose to sell off for larger checks or keep them as rentals or owner financed deals for cash flow.
It's a numbers game! I don't usually buy notes with the rental strategy in mind but I do in areas I know and or have amazing property management in place. TX and FL are my two "home" markets that I'll look to entertain the rental business side of things but I'm also exploring OH and MI more due to the fact that appreciation and there are still deals in those markets.
I did a presentation on what your first 10 note deals would like if you end following the trend of 3-4 modifications, 3-4 DIL's, and 4-6 FC's.
Also, don't be afraid to look at the CFD (Contract for Deed) play!
it all depends upon what you are trying to achieve, slow steady growth, or the potential to create wealth but with a lot of effort and work. I would hold notes to diversify my holdings and try to lock in some type of guaranteed rate. Real estate buy and hold has so many advantages, look into the benefits
There is one issue that I rarely see addressed in the discussions of buy and hold vs notes. Assuming that you (as the landlord/owner) maintain the asset, your cash flow never stops. In very SHARP contrast, notes "end". (mature/pay off/ however you want to term the event)
This can be managed, but the point must be addressed. To address this quite simply, an investor can roll a portion of note payments received into new/more notes.
In contrast, if you buy and hold, and have X number of doors all paid off, with reserves in place, and great PM, the checks never stop.......ever...... Obviously, this is a gross over simplification, but the point stands. Buy and Hold "never ends". Notes "end".
This is only important, I guess, if an investor desires to build "legacy wealth" for their family. But I thought I'd just make sure that the required "replenishment" of notes is built into everyone's plans.
@Bill B. I can agree with you on a certain percentages of notes...especially if you are owner financing a property or just lending out money at 12% and you get refinanced out or the property gets sold.
With me buying NPN's, occupied assets at usually below 50% of Fair Market Value, and if I can get the borrower to modify, then when and if they do refinance out, then it helps me "double down."
Let me give you a scenario.
Borrower owes $125K on a home in IL that is worth $60K. They've been trying to do a loan modification for 4 years but their loan has been sold several times. I buy the note at $20K or at 33% of FMV. Their original payment was $825 a month. Rent in the area is at the $700 range.
After I close, we do borrower outreach and get a hold of the borrower. They want to stay in the property. They are looking for a payment in the $650 range and they do have some money to put down ($5,000) as they haven't made a payment in 4 years.
So we do a forebearance agreement for six months of them bringing $5K to the table and making their existing payment on-time for six months. After that, we will reduce their balance to $60K and reduce their payment to $650 a month. Their interest rate is at the 9% range because I've forgiven them a ton of the upside down loan amount. And I honestly want them to work on getting refinanced out through an FHA 10-23 program that will refi them out after 3 on time payments at 97.5% FMV.
But let's just say that they don't. They are making $650 a month payments which is less then market rents for the same home. There is no vacancy to deal with. No repairs. They take care of the property. My first year cash flow is $5K down plus ($650 mo X 12 Months =) 7800 or $12,800 on a $20K investment or a 64% ROI. After year one, the ROI drops to 39% because I'm just collecting payments.
But as the bank, the borrower owes me $60K still. So if they can pay me off, or refinance me out through FHA, then my ROI would be crazy. Here are the numbers.
$5,000 Down Payment + $7800 in mtg payments + $58,500 (FHA 10-23 Refinance at 97.5% of FMV) = $71,300 in total income. Subtract the $20K investment of purchasing the NPN + $2K in attorney fees for servicing/documents on the high end and I've just netted $49,300/$22,000 = 224% ROI.
I can take the $71K and buy 3 new assets now and then those three turn into 9 assets, etc....
This is why I love the NPN business and not just traditional owner financing/lending. Here is the photo of the asset in S. Beloit, IL that we did this on.