Questions about strategy: buying notes vs. buy and hold

1 Reply

As I've been doing my education over the last three months, I was was dead set on the buy and hold strategy.  I still think it's a great strategy but I have a significant hurdle in that I want to invest remotely.  Yes, I know it's been done plenty of times but as a newbie, I don't know if I'm willing to take that risk.  

I like buy and hold b/c of the cash flow potential and tax advantages with interest and depreciation write-offs.  However, I got very discouraged when I realized I would probably need around a dozen (give or take) properties to cash flow at "just" $3K a month.  

Anyways, I've recently been reading up on note buying but am not finding the info I'm seeking.  It's still somewhat difficult to wrap my head around what note buying is and what it entails.  

A few questions below...

  • Does note buying has the same cash flow potential and tax advantages?
  • What happens when the note is paid? How do I make money off the note then?
  • How would you compare cash flow vs. getting paid a high return on a note every month?  I'm still trying to wrap my head around this.
  • How would you compare finding deals? Discounted private note vs. discounted SFH?

Any other info you could provide would be great!

When you purchase a note you become the lender and collect interest payments while the homeowner pays down the note. The interest you earn is treated as ordinary income so not as tax advantageous as the passive rental income and depreciation writedown from owning real estate. When the note is eventually paid off you rinse and repeat the process by purchasing more notes. If you are looking for $3K/month interest income you will need to own several notes just like your example of 12 rental properties. 

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