What Are Your Thoughts on Note Investing?

Question

Hi everyone! I'm back after a 1 month hiatus from BP (I was busy doing 15 year old stuff). I wanted to know what BPers think of note investing. By this I mean finding a property, acquiring money from private investors at an above market interest rate, and giving a buyer owner financing for an amount higher than what you paid for that is based on comparable rents.

Take For Example this scenario put forth to me by a notes investor...

"A 3 bedroom, 2 bath apartment rents for $950.
	
	You find a home in that area you can buy for what seems like a very
	low price.
	
	Let's say you can buy this home for $30,000 and by the time you
	include $2,000 to put into your pocket and do a little clean up and
	painting you'd be into the house for $40,000.
	
	$40,000 is our BASIS (what we have in the deal).
	
	This is how WE back into a sales price based on the rents:
	
	Take the $950 rent and subtract out the the tax and insurance
	expense; what you'd have to pay in taxes and insurance if you owned
	a house in the area.
	
	Let's say in this case the taxes were $100/mo and the insurance
	would run about $50/mo.
	+$950 Rent
	-$ 100 Taxes

-$  50 Insurance

=$ 800
	
	WE see that this tenant can afford to pay $800 for principle +
	Interest and by the time they pay another $150 for taxes and
	Insurance their payment to own is equal to what they were paying
	for rent. So what does that make your sales price?
	
	As luck would have it (or by the terms I chose to use) it's pretty
	easy math:
	
	$800 = $80,000 financed amount @ 10.5% for 20 years."

The cash flow seems great, but you build up no equity and don't own the property over the long haul...

Your thoughts?

Thanks in advance,

John Elmenhe

Jay Hinrichs · Answer

John E.

that's a sub prime loan that will default at some point. If you have the idea that that will be a solid note...I would advise caution. And if its owner occ like your talking about you have to adhere to all the new rules. which may preclude this renter / owner from actually being able to purchase.

With the new rules more and more people will be life long renters as long as seller carry backs follow the rules that is

Jay Hinrichs · Answer

John E.

Please do not take offense however based on your questions I think you need to educate yourself on this whole bizz before you leap.

As Wayne says   seller carry back for double the wholesale value has been going on for years and years.. And it has all sorts of variations.. Like sweat equity.. I had clients that were buy Detroit houses for 2k and selling them on contract for 30k never looking at them never meeting the buyer... The hopes was the buyer would fix up the house and stay there because its cheaper than rent and they can pilfer components from the houses right there on their block...default rate is right at 90% within 3 years.

Account Closed · Answer

What I was saying is follow the DF and safe act and you will be ok.

Joe Gore

John E. · Answer

@Jay Hinrichs

I definitely do have a lot to learn on this whole bizz.

I can see what your clients were trying to do in Detroit and there results. Yikes!

Thanks for the advice.

~JE

John E. · Answer

@Joe Gore Can you elaborate a little on the rules? Do you think it's a viable strategy?

John E. · Answer

@Jay Hinrichs I see what your getting at. After all, sub-prime mortgages were one of the leading factors in our recent economic downturn. So this is what a lot of institutional investors were doing before the bubble burst?

Rent-to-own seems like a viable strategy.

Thanks everyone!

~ JE

Account Closed · Answer

@Wayne Brooks,

You will have a lot of new comers that will fall by the wayside unless they follow the rules on note buying.

Joe Gore

Brian Gibbons · Answer

do a lease and a straight option, no rent credits, no Dodd Frank

Wayne Brooks · Answer

Google up Lonnie deals, and read the info on Dodd Frank.  This is nothing new, just recycled Lonnie deals on houses, sell a house to some uneducated, unqualified buyer for twice what you paid for it, using owner financing as the carrot..  Doesn't work so well these days.

Ray Morris Jr. · Answer

John,

I've thought about doing this type of deal in the past.  I haven't done one yet because I don't like giving up control of the property and it's easier for me to evict than foreclose.   I figure that same tenant can just be a long term renter with me or do a rent 2 own deal and then cash me out.   I'm not comfortable with dealing with a potential foreclosure or bankruptcy.

What Are Your Thoughts on Note Investing?

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