Why to invest in Notes?

90 Replies

I am not sure there is really a good thread here in BP which address this question.  I know there are many blogs but those do not provide expanded conversations around the idea, IMO.  

If you are a seasoned, new or potential loan investor regardless of performance, skill, knowledge or training chime in.  I know in advance, that this may be a tall request and many/some will not want to chime in, but I think it would do a good service to really start addressing the expectations that are flowing in the background and help put some light on realistic approaches and ideas to some of the core reasons folks consider jumping it, do jump in or stay away from investing in whole loans/notes.  

Some general questions:
What is attracting you to this asset class opposed to others?   

What are the expectations that you have, think you have or may have heard in regards to the amount or level of return one can expect?  

What is the amount of time a single investment will take or do you plan for?  Or your general investment horizon per asset.  Perhaps why that is your target as well.

What is the target amount of capital you believe you need or plan to work with or do work with?

How do you believe you will exit your asset investment specifically?  Perhaps a better way to say this is what is your most hopeful exist, highest best, as you know it.

How does that exit affect your return in your opinion?

I am not trying to sandbag anybody.  I really think this conversation needs to take place.  I hold this general conversation with many of the new investors I have talked with and some of those have been from here on BP.  

The fun and familiar motto is something to the effect of "Be the bank" - well, what does that really mean to you?  

The more open dialog, the better.

@Dion DePaoli . Thanks for starting this thread!!

 When I first started flipping, projects were easy to come by. I have dabbled in rehabbing and flipping for over 5 years now. Currently, there are plenty of projects in my home town. I just don't think there are any profitable exit strategies; or any that suit me. When I first ventured into flipping, anyone could be qualified. Now, all of those projects are in an area of town that it is difficult to get financing with the current demographics. Little Rock has about 5 flipping seminars that come to town annually. They produce a group of "Newbies" that keep the purchase prices in an unprofitable range for more desirable projects. I believe I have enough capitol to start with that competition from "newbies" will not be of great concern in the note business.

So, I first heard about note investing a couple of years ago. I was completely uninterested until recently. I started hearing about successes here and there. I started watching this forum on BP. But, I was like a goat looking at a wrist watch. None of the info clicked with me until our local REI club was visited by a rep from the Noteschool. I really liked the way he explained doing this business at arms length was the way to go with NPN. So much of it reminds me of doing my due diligence on a flip. Servicers, property managers, ETC, ETC all is right down the ally I am thinking now. NOTE: I am severily handicapped with rehabs because I love to DYI. I know I should be hiring contractors. So, having all of these services to use in the note business really attracts me.

I have always looked at REI as a way to supplement my retirement (5 to 7 years away). I am too old to be DYI rehabs. My IRA's have really been doing good the last 5 years. But, I am fearful they could take a correction at any moment. So, notes and loans secured by real estate interest me now using SDIRA's. At the same time I am learning about notes, I am also learning and trying to decide what my best options will be as far a check book or conventional SDIRA will be. Through these studies, I am growing an interest in hard money lending as well.

I don't know what my "target capitol" as you called it is. I know what I have to work with. Retirement will be solely from my IRA's and what little the Gubmint will allow in SS. So, I want my exit to be more passive for the next 30 years with enough annually to continue my current spending habits; hopefully less a mortgage in the next 5 years. I don't have a problem with foreclosing, DIL, or any of the other exits that may not be so pleasant so long as notes were bought/formed right in the first place.


This is my very first public post on BP and I am very happy to respond to your request, Dion.

Firstly, I completely agree that this is a very important topic.  Kudos to you for starting it. 

Even though I have been involved in R.E. for more than 25 years, (mostly finer uppers, buy and hold, short & long term rentals), "notes" were a brand new area for me. I have been surprised three ways:

How little I knew about notes and how extensive the subject is.

How little good (& accurate information) there was out there.

How much more complicated & subtle a business model than other REI

Now to answer some of your questions. The reason that I was so interested in delving into notes, is because:

1. I was looking for a more passive way of investing.

After having to deal with every difficulty imaginable with contractors & renters, I needed something a little calmer. As I am planning my retirement, I just don't have the stamina or patience that I once did for all the problem solving that everyone knows is the key to being successful in real estate. 

2. The returns for traditional real estate have done way down (especially from asset appreciation) and the expenses to maintain a home way up. It does not surprise me that the younger generation is going through a major re-thinking of the owning/renting equation.

3. Competition is REI has taken off. Whether your are doing straight purchases or auctions or tax liens, the number of people involved has increased dramatically from years ago when I got started.

4. I manage a portfolio stock heavy and bond light so I was looking for a bond proxy. This is a little more complicated to explain and off the subject a bit so I will just say that with the fear of rising interest rates over the next few years, I was looking for a replacement for my bond portfolio, which I have been cutting back slowly over the last couple of years. I was trying to find something that had a better yield than the subpar current non-stock offerings. Even 4 or 5% would have been terrific compared to what treasury bonds are paying!

For all the above reasons, I started to examine "simple" notes. By simple, I mean that I had in mind what I thought would be the easiest, most straight-forward mortgage note I could find. I learned early that the note "business" was much more complex than I ever had initially imagined. More complex both understanding them (and all the possible problems in the underlying asset), and finding them. Even after I took Dave Van Horn's terrific course, I have decided to tread lightly. I have purchased several and even a note fund, but I am treading lightly until I get a better grasp and do more research. 

I would urge other "note newbies" to do likewise. 

I'll chime in a bit, I'm all over this site with comments on notes, but good thought Dion.

I'll point out that I started out in a different world than most. While I bought some paper when I was in the Army, I didn't really jump in until after I had a mortgage company, so loan issues and notes came to me through the business, buying the note was another aspect of doing the business. Later, I set up the only loan guarantee for equity or private notes in the country, basically I bought the note as conventional loans are guaranteed like VA or FHA but since I didn't have a hundred million, financed the purchase or I assumed the note as a servicer. I was also in a position to refinance the loan putting the borrower in another loan paying me off. I also had investors with very deep pockets, made their loans, serviced them, guaranteed them , refinanced them on short payoffs and carried the balances. I also did participation loans buying out other investors.

That led to commercial lending, I'd buy leases, do floor planning, equipment and even did some ag deals.

In ten years we pumped through thousands of loans and held a balance of just over 2,000 in portfolio, larger than some small banks.   

I owned rentals for years, too much hassle for me to really grow, notes means no toilets to fix or cleaning units or ongoing maintenance, just sit at my desk on the phone.

I didn't "make real money" holding notes, but in moving them through and refinancing them.

I also was the only "Note Appraiser" I knew of in 7 states and the State of Missouri sent notes to me to be valuated for various situations, with the understanding that my company could bid the note as well, so the state fed notes to me. Those also led to other sources, attorneys, accountants, trust administrators, hospitals, nursing homes and estate managers.

It's unfair to put a note investor or Realtor or contractor dealing in notes in comparison as to size or scope or even as to the latitude of transactions with me, not bragging but I was in a very unique position. I had a distinct advantage as a bank examiner, banks did not fear dealing with me, even taught some a few things, investor trusted me, attorneys listened and accountants didn't argue much. 

Not saying folks must have an MBA, have banking experience, sales in financial products, or loan compliance knowledge to buy or sell a note and a vision, but it helps.    

I'd be lying if said I planned it all, there was no business plan that took in all that I was doing.

The hardest thing to teach is teaching people how to think. I can teach any aspect of the nuts and bolts of the business end or the bigger picture, but I can't teach imagination.

Between this post and 15,000 others here you can paint my picture.

Not only is the note business very good it can lead to other opportunities as well. 

Sorry for not addressing each question Dion, but this might add to the conversation. :)      


@Dion DePaoli , yours is a great post, and one I am happy to address. I am a new note investor, however I've been a commercial real estate broker specializing in retail properties for close to 25 years. I've been involved in a lot of facets of the business These include the development cycle (i.e. planning a shopping center or mixed-use building with retail, leasing it to anchors & other retailers, watching it get built, and re-leasing space 10 years later) to reletting existing storefronts. I've also been heavily exposed to the finance side of the business, so I feel like I have PV, NPV, IRR and other rate of return calculations down cold. I understand time value of money.

I mention all of this only to provide a background, which has certainly formed my expectations of the note business.  Here goes to responding to your questions:

What is attracting you to this asset class opposed to others? To use another well-worn expression, "no tenants and toilets" would be the primary reason.  Lower-maintenance real estate ownership that draws on the experience I've mentioned above.  The other motivating factor is the ability to buy a note secured by a property out of state.  My goal is to transition from my Day Job into a "volume" business in notes--brokering, investing for my own account, raising "friends and family" money alongside my own to scale the business--and you can't exactly do that if you have to visit the nuts and bolts of every property.

What are the expectations that you have, think you have or may have heard in regards to the amount or level of return one can expect? 10-15% for performing, higher for NPN.

What is the amount of time a single investment will take or do you plan for? Or your general investment horizon per asset. Perhaps why that is your target as well.  I don't need or necessarily want to "flip".  I am willing to be patient.  That means 3-10 years probably.  Of course, if an opportunity presents itself to get out sooner, I'd take it.

What is the target amount of capital you believe you need or plan to work with or do work with?  Minimum of $25K.

How do you believe you will exit your asset investment specifically? Perhaps a better way to say this is what is your most hopeful exist, highest best, as you know it.  Selling partial, refinancing, brokering.  I suppose I could sell in an exchange, but if I get into an asset--unless the you-know-what really hits the fan, or if I'm presented a good opportunity as I mentioned above--I'm thinking I'll be patient, and "let the market come to me".

How does that exit affect your return in your opinion?  I'm not really sure how to respond to this question, frankly, since I mentioned several exit strategies above.

Now go ahead and shoot holes!  I don't mind.

@Dion DePaoli know that I read all yours posts, appreciate their value and your attempt to cover the questions posed. When I see folks talk about notes its almost like talking about old cars or a "box of chocolates" as Forest famously said. We talking 246 GT Dino Ferrari, 1939 Packard, 68 Pontiac Firebird or 1970 AMC Gremlin= owner carry, 1st position, 2nds, under water Vs. equity, performing Vs. default seniors, purchasing partials. They are incorrectly dumped into the generalized discussions. I don't think note investments are for greenhorns, especial NPN 2nds. Start with a simple OWC and work up.

1-Why=The past years of hard money lending have given an opportunity to compare both notes and REI. @Bill Gulley already mentioned the lack of toilets in notes. Rentals, whether commercial or residential, require active involvement Vs. little involvement in the notes(thanks to servicers). Availability of NPN 2nds over next 3-5 years is a factor because I can't compete with Oak Hill and buy $659 million from Freddie Mac at .76 UBP or Lone Star Funds-John Grayken, paid almost 66 cents per dollar of unpaid balance at the June HUD auction, winning bids on all 16 loan pools of NPN 1st's. I'm a minnow see.

2-Note returns= vary as well based on goals and product type. 15-20% yields for 1st's(its fine, boring but its mailbox money). Underwater 2nds can be a total loss to a 600% return. Our investors worst NPN 2nd pool was a 25% return to date.

3-Time=performing notes take about 15 minutes a month to account for each one at most. Pools need about 2 years on NPN 2nds to work through with servicer and take patience.

4-6 Investment amount and exits= It might help to answer the rest of the questions as a BEST CASE, hold for long term, cash flow, NPN no equity 2nd scenario. The other obvious exit to long term hold is a sale of 6 month seasoned reperformed notes at a 15-18 yield. Compare note potential to REI potential. Will have to generalize to make this work.

Assumptions NPN 2nds underwater based on past experience:

Price of notes: 20% of UPB (some are cheaper, some are more expensive so pick a blended number)

Face interest of note: 10%

Face value of note: $70,000

Percentage of complete loss of notes: 20%

Percentage of settled of notes: 20%

Percentage of settlement rate: 180%. i.e. 100k note, 20k purchase, 36k pay off

Percentage of re-performing notes: 60% at 7%

Terms of re-performing notes: 7% interest, principal paid off when property is re-financed or sold.

Term of performing note till property sold or refinanced: 15 years (historically 7-9 years but these may be less apt to sell due to value issue)


Buy 5 million face value of notes for 1 million.

20% are wiped out leaving 4 million of notes

20% pay off for 360k leaving 3 million of notes

Basis; 1 mill

I would like to see @Dave Van Horn  chime in since he has been discussed above,

"Even after I took Dave Van Horn's terrific course, I have decided to tread lightly. I have purchased several and even a note fund, but I am treading lightly until I get a better grasp and do more research. I would urge other "note newbies" to do likewise."

Dave, why is it that folks can be enlightened but are still so cautious? No one seems to want to believe notes that we have all been conditioned to believe are bad, actually produce cash flows. After all, buying a note is really just buying a monthly payment stream.

subscribed. great thread as a greenhorn with capital considering notes, this is some great reading.

please continue... :)

Great stuff so far. Thanks everyone. I know there are some folks lurking in the background still as well. "Jump in". This is not a who is right or who wrong thread. We will save the sandbags for the end of hurricane season. Bill touched on the best way this thread can be of value to some degree to folks. Thinking about the asset class properly is a huge step in the right direction. Well, said Bill.  Can we draw out those distinctions?

There seems to be a general attraction which is on point of interacting with the 'property' less. I believe that is not the same as meaning 'less work'. In certain circumstances working with a distressed borrower is still a fair amount of work. Different labors but work, nonetheless. I tend to think then of the extremes of the spectrum (right & left) are easily defined. Where the right side is completely passive or as passive as it can possibly be and the left side is extremely active in its own right. The middle is a little blurry and can swing from right to left. I view the types of loans that follow this mental picture as being prime performing loans on the right and defaulted loans on the left. In the middle, we have varying degrees of deliquency and default with some ebb and flow.

For me and our groups, that idea helps stablize the ideas that flow with pricing, return and work to some extent. It is a little clearer for the right side, the passive side and I think it gets jumbled up a little when we consider the left with default. What I mean there is, if I don't want to have to do anything, really much of anything at all, not think about it, not complete any action, etc., I think prime loan. A borrower with a nice credit score, a good down payment, a property in good condition, and all the other bells and whistles to boot. If I go buy one of those prime loans, I am generally going to earn 5% +/- depending on where prevailing market rates are.  There is nothing to really ever do.  The loan has a high propensity to simply pay as agreed.  I simply cash the check.  

I personally think, and I teach it to our investors and traders and partners alike, that idea to help keep us grounded in our return expectations. I am not overly interested in earning just 5% and most of the time with the way our capital is structured that number simply will not do. If it could or would, I would take in a heartbeat and do other things like fish and golf (nasty slice every other season, love to hate that game). Anyway, I use that idea as a root system to tie us to and as we go up in return expectation our risk expectation also goes up and our activity/workload expectation follows in some tandem as well. If we were to box the idea of this side of the spectrum, I would describe it as all loan. Not too much, if nothing at all to play with and it is all inside the idea of simply the loan.

So then, I look to the other side of the spectrum and have reservations as well. For me and the way we have always operated, including buying loans and real property, there is no real difference once you own real property. I don't swing hammers. I don't DIY. I do manage on a pretty acute scale though. I have become pretty comfortable with understanding how to serve our needs by managing real property from far away. Truth be told, there are many contractors, real estate agents and similar service providers that may not be too fond of me, but the results have usually been pretty decent. When we look at defaulted loans, non-performing loans, the assumption is always we are going to end up with that property. Typically, we will plan on foreclosing, evicting and selling the REO. Personally, I don't think there is much merit in trying to say I planned for any different outcome, even though I am open to any alternate outcome. So if we box this side of the spectrum up, it is part loan and part real property. I am usually pretty forward in comparing our treatment of real property to be no where in the ballpark as folks who actually fix and flip full time or alike. I think they are better at those things than I care to be. So in my mind, there is the level, if you will, in the segment of this box that is real property that I don't think we mess with and frankly, we are fine with it. I am not interested in having the most updated nicest property for sale on the block. I am simply interested in getting it for sale on the block.

So, I think right there is the collision of two worlds. I don't think, I think (I know I do not) like a flipper or rehabber. What I have found, or believe I have found, over the years is that is an interesting distinction and an important one. The comfort we have with defaulted loans including the work load of the loan and the real property keeps us capped at pricing non-performing loans at targeted returns of 20% per annum. There are many inputs that go into that idea and that is not the point I am trying to pull here, so we will come back to those ideas as the thread expands. However, one of the main drivers or concepts that fuels that number is staying 'skinny' on expenses. I am trying to get through the race as fast and less expensive as possible (not to be confused with 'cheap'). I don't think we have an expertise in looking at real property and coming up with super nice finishes which attempt to push the maximum of the neighborhood values. I think we can zero in on getting pretty close to the upward side of spectrum or perhaps the better way to say that is, avoid the bottom and not define the top while being happy in the middle. Personally, I find it an interesting quirk of mine, that my brain to some degree just breaks when I try and look some of the stuff full time flippers do to their real property. I am comfortable with my capacity to assess property value, but I guess it's some frugal trigger that struggles to quantify what I think is risky most of the time in upgrading some of the property. Truth be told, friends and family members don't like it when I walk through their projects of doing these things as my I have a concerning tone of the amount of money they spent and whether they 'truly' recover or if it simply some offshoot to ego. (I am ducking after saying that).  Perhaps there is an interesting idea to explore later on my idea of what it means to "buy a foreclosure [property]", essentially that does not mean the same as discount, which I find common in the public.

To some degree, it's a little bit of an art. I respect those who are good at it. I realize I am not. If it was an art class and the teacher said, draw a picture of Billy and his house. Mine would be a stick figure and a box with a triangle. Those who do well would have a da Vinci.

This key distinction which is some part of staying with the idea of the workload between the targets of today's market for us 5% on the low passive side to 20% on the active side is at times a bridge too far. What I mean by that is, we have certainly sold and marketed our fair share of loans to newer and lower capital level investors. Honestly, you guys are some of the hardest folks to put a deal together with that are out there. I have spent a lot of time and brain power trying to understand the barrier and driving force. My theory is related to this collision of two worlds. It has some tangents from the effect but at it's core, I think it is driven from something close to this idea. I think that because, I will be fairly honest, there is no magic here. I am not going to do something so unheard of, so new, so revolutionary to the loan to get through it, to finally dispose of the real property that you can't do on your own. We both have to pay for an attorney. We both have to pay for servicing. We both have to make the same advances. For the most part, those numbers will be darn close to each other all the time. I don't get any deals that you can't and vice versa. The biggest variable, I believe is how we value the input capital into the real property, what I will spend to be able to sell. For me, I want to stay as inexpensive as possible. I think the second biggest differential is the value of our capital. I equate this to being comfortable with the risks that come with the asset (both sides loan/property) and how we will deal with surprises.  Generally, not to concerning as I think we have a pretty good handle on what we know, what we do not know (yes, there are things that I need counsel or seek counsel on from others).

I am going to pause there for now. Curious what the readers think of those theories. Do we really think of the asset in the same mindset? Do we approach the value input and output from the same angles?

If some of that holds to be true, then should we really teach seminars or note classes that relate ideas between the two different forms of assets or is that really an injustice?  

When we look at a loan, I like to think we just look at the dollars.  Do newer or other loan investors or potential see the dollars or see the dirt?  

Wow Dion that was a monster post even by your standards.  :-)  Kidding aside, good topic for discussion.  My thinking aligns with your right-side left-side, passive/active spectrum as well.  For me, I am working in both spaces right now, but not far right or far left.  In the end I want to be 100% on the passive side.  As for why, I think that notes, if used properly, can provide great returns and capital security not found in many other asset classes available to individual investors.  The business is also fairly scalable.  Also, for me anyway, there is value in helping people and those opportunities exist in notes, particularly on the non-performing side.

Originally posted by @Tiger M.:

Dave, why is it that folks can be enlightened but are still so cautious? No one seems to want to believe notes that we have all been conditioned to believe are bad, actually produce cash flows. After all, buying a note is really just buying a monthly payment stream.

 Conditioned to believe notes are bad? Is it because I post here?

No, buying notes is not jus buying cash flow, that's the financial side. If that's all you are doing and have cold feet, stay in a fund, annuities can be had from insurance agents.

Besides the money, I liked knowing my money wasn't backing some sleezy corporation, polluting the ground or air, wasn't used to make people fat or die, that it had a social purpose, built dreams for families, kept an elderly person in their home, gave people a chance to build a nest egg or go into business. I know the money directly adds to my local economy, feeds construction workers, even Realtors, pays the bills and provides a living for others, from the dentist to the driver of the garbage truck.

I didn't feel like I was a user in my community but a provider, I saved people's homes and helped good people in hard times. I solved problems, loved and honored by many, disliked only by a few, you gain respect and admiration, you have the opportunity to interact with people, teach and advise them. You change people's lives for the better. 

I put people in business, paid my staff, supported my family and was very well compensated for my efforts.

If it had been just about cash flow I would have retired even earlier than I did!

Yes, I rented money, just like a landlord rents a house.  I made money, a lot of money, but I never screwed anyone over to get it.

I pity those who wrench their hands trying to make a deal with the public, (Maybe with some other wheeler dealer, but not the pubic). No integrity.

And, I controlled my business, didn't have to do anything I didn't like.

If I took a DIL or collateral it wasn't because I set someone up to fail, they did that, they blew my trust in them and I held them accountable per our agreements. I don't like thieves whether they carry a gun or a brief case.

So, there is much more to lending or extending credit, whether you made the loan or you buy it than just cash flow.

If it's just about taking advantage of others for cash flow, please don't deal with the public, just deal with those like minded or get an annuity.

Tiger, this isn't directed at you, it just pushed a button as to a much bigger professional picture as to being in mortgages.  :) 


Originally posted by @Don Hines:

... But, I was like a goat looking at a wrist watch....

OK, this made me laugh out loud.

And also, I am enjoying reading this thread. I am still somewhat mystified by note investing but I am learning. At least, I haven't tried to eat the watch.

Not sure if I am invited to post here since you don't like rehabbers (I'm joking of course, no offense taken) but will anyways.

What attracts me to this class is the passiveness after purchase and the yields that can be obtained without labor, no matter what I am doing or where ever I am.

My expectations are to get 13%-20% (or more when possible) returns on capital and thus far, have only tackled the performing note biz.

My target capital numbers can vary depending on the location and asset class securing the paper but typically, $15k on the low end to $100k on the higher end with abilities to go higher. In total, I would like to place several hundred thousand and combine that with money I raise from others increasing my returns. My expectation is to have a minimum of $1M working and get that amount higher over time.

My exit will be any number of the following: Note matures, borrower pays off early, sell all or portion, note becomes NPN and foreclose or deed in lieu.

As exits come earlier than the full term, returns increase, they negative is that I must find new notes to re-invest that principle and portion of interest.

Now, on the flipping topic, I can't say with an absolute fact that each and every item of expense I put into each rehab flip gets me both my money back and a return on that capital, but it is pretty hard to argue with success and I have been successful doing this for many years on very high dollar figures. I have a knack for turning an ugly or outdated home into a brand new looking home and in doing so, I create more value than the costs associated with that process, therefore, I have a positive net result and excellent COC doing this process. With that said, I would have no problem taking back an NPN which required work and adding more equity by doing a renovation on it. It would just not be the original intent of buying the note but an exit strategy of mine in such circumstances.

Great post by the way Dion, I am anxious to learn from it.

Will, other peoples money(?), did you get your mortgage broker's license?

Those reading this thread wondering about getting into notes, investing in notes is with YOUR OWN money, not using OPM, in any form.

The only money you can borrow is from your own assets. You can not partner or pledge part of a note to invest in a note, unless you borrow on your own account, that is a brokerage activity. Participations. If you have a registered investment club where your registered group bought a note that would be different. We have been over this on BP before, it gets deep. 

Understand too that a mortgage is a security and it's regulatory side is exempt under conditions, when you start slicing and dicing interests with investors you can find yourself in trouble.

The other problem is that on the investor's side, someone has to get paid from foreclosure proceeds first, it's not an even distribution, one cent off and it's not even so saying you split 30% of a note, the question is which 30%, and who gets what when?

If you are seen as "being in the business" rather than investing your money and seasoning a note, you better have a license. Flipping notes is not flipping houses. Much more to it than RE.  

Back to the topic I guess, don't want to clog it up with off shoots of why I can't do this type of stuff.    


@Bill Gulley You should be an example to all the newbies. Starting in traditional notes first prior to tackling NPN even at your experience level is telling.

Bill, funny you did not come in with your post when Jim posting the very same thing above. Anyways, I was not clear in my post as I don't try and win the most sentences in a post contest here. I do not have my broker's license, however, I have a partner who does. Secondly, I can raise funds from others, secure said funds with properties I own and invest that capital in notes along with my own. So long as my yield on the note is greater than the cost to borrow from my private lenders, I create arbitrage.

Now, if we can get back on to the topic, I would love to learn more from others experiences and as much as i can from Dion who started this great thread.

Well, I guess I'll be the first "real" newbie to post here.   (when you've been in RE for decades, or do fix and flips that net seven figures, that (from my seat) is FAR from anything that I'd call "newbie".)  


What is attracting you to this asset class opposed to others? 

  • I'm too old to do decades in RE in prep for notes. 
  • I have one deal under my belt.....and thankfully did it when the market was still rising quickly as that is the only thing that minimized the loss; the list of mistakes is long and too familiar here on BP to waste space here. But, once burned twice shy. That, for me, translates into limiting risk on any one deal to $20,000 to $25,000, $50,000 if it is a screaming buy.
  • I live in SoCal where starting out in RE is very intimidating. e.g. I live in a working class area where 1960s 3/2 fixers are selling for $475,000.....and that is down from six months ago. The down payment on a fixer here is a cash purchase of an A List property in several areas of the MidWest. A NPN on such a property brings investments down into my world.
  • I have family members with special needs for whom I am the primary caregiver, so "working nights" with notes is appealing.  I fully understand that there will be "daytime" work involved, but doing online due diligence, reading packages, etc can be done while everyone else sleeps.  Also, being the caregiver makes driving to the Inland Empire or Lancaster/Palmdale difficult.
  • related to the previous point, but standing ALL on its' own is "no tenants/no toilets".  :-)
  • I've met an individual who lives locally at our local REI who has successfully invested in several NPNs; he's agreed to mentor me.

What are the expectations that you have, think you have or may have heard in regards to the amount or level of return one can expect? 

  • my immediate goal starting out is to not lose money. 
  • my near term/intermediate (six-nine months) goal is to build relationships with small/regional banks and help them with their NPN (my question back to BP Nation: is that realistic or pie in the sky???) That hopefully will bring returns a bit higher than 20%, (just a bit, not unrealistic) and a volume that I can use to earn referral fees to grow my capital base. @Bill Gulley, while keeping my arms and legs inside the car at all times; i.e. doing it with the proper structure, terms or conditions so as to be in compliance with the choke chains provided by the "best and brightest" in D.C. and Sac.  If it means becoming licensed/a broker, I'll look into the time/cost to earn those credentials. If I can't do it legally, and ethically, I won't.
  • My long term goal (four or five years?) is to begin mentoring my daughter, niece and nephews so that they don't wake up in their late fifties in the situation that I am in.   

What is the amount of time a single investment will take or do you plan for? Or your general investment horizon per asset. Perhaps why that is your target as well.

  • If I've heard my mentor properly, minimum six months, more likely nine to twelve (and sometimes more) for any individual note.

What is the target amount of capital you believe you need or plan to work with or do work with?

  • Far more than I have.   :-)
  • More seriously, we have about fifty thousand liquid and nearly two hundred thousand in self directed IRAs that will be deployed AFTER I do a couple without screwing up. After that, my parents will miraculously and instantaneously "know" how to start investing a portion of their IRA's in performing notes and a smaller portion in NPN, keeping diversified into stocks as well. They have a couple hundred thousand as well. So, all told enough to keep me busy.

How do you believe you will exit your asset investment specifically? Perhaps a better way to say this is what is your most hopeful exist, highest best, as you know it.

  • One of the things that appeals to me about NPN is that I can potentially help people in need.
  • My sincere hope is to help people work out loans in a way that helps them, and me. (using qualified service companies ONLY, of course....and all the other things that I'm learning about here on BP and from my mentor.)
  • I fully understand that FC is in the mix and is unavoidable.  At some wholly illogical and unbusiness like thinking level, I think it fitting that the returns I've been told about are normally less for FC than for working out a loan.  What I mean is that it just seems "right" that helping someone keep their home should pay more.  I fully understand the economics that drive the facts, I just think it is great that it works out that way.  

How does that exit affect your return in your opinion?

  • Well, the "exit" is somewhat dictated by events out of my control, right?  If the owner wants to stay, hopefully we work things out and I have an asset that (after seasoning) that I can sell, or I just keep it.  If not, a DIL, or FC (if I must) and then resale, hopefully to a fix a flip expert.

Dion, I don't know if this is what you had in mind.  I hope it is a useful contribution to the thread.  

Finally, I made an offer yesterday on my first NPN; don't know if it is accepted yet.

Wish me luck!!!

@Bill B. I wish you best of luck! I hope your offer gets accepted. Its good to see you picked up a mentor. Appears you have a handle on the realistic strategies. I've been in RE 25 years too and wouldn't have gone in this direction with out some hand holding at first(I hope it was my hand being held...). I was nervous as a cat in a room full of rocking chairs on our first pool. Buying one NPN at a time is outside our tolerable risk threshold. We would rather buy 10 notes at $2000 each than one at $20,000. Thats 2nds I'm talking about. One totally lost, then goes from a 100% devastating loss, to marginal 10% loss than can be offsett by just one other good note. Glad I'm not the only one with long post.

I spoke with my contact at US Bank, and they are getting ready to release some 1st non performing notes in Nevada very soon.

Joe Gore

From my point of view there is a huge demand to provide funds on the performing side.

There are plenty of states that one can lend in where HML are exempt from Dodd frank for commercial purposes.. and there are states were that activity is not exempt. As HML in Oregon our target was 20% apr and all were performing.. And that business is out there in certain markets to be had and even greater returns for performing.. Of all the notes and loans I have done over the years I have never got into a deal that was none performing at least at inception I have had my share of bad loans especially in 08 09 .. I understand the whole NPN craze and I can see that in firsts but for newbies or those that can't scale to buy NPN seconds I don't see that at all.. And I think most newbies would be well served to find a good HML who can get them 10 to 14% on local loans and call it a day.. Once you have some experience then one could venture out on their own.

Will, I haven't read all the posts, didn't read the other one. I read yours because I know you here and have, I feel, a good sense of how you operate in lending areas. I'm not arguing with your popularity on BP, I never expect you to take any of my compliance suggestions, I'm not concerned with you getting out of compliance I just point things out for others who may weigh the risks before they act. The same thing applies to the other post as well. :)

Tiger, I'm seeing your valuation process as perhaps a conventional bond approach, financially logical but IMO flawed if you're assessing from the point of view of an IRR to some degree as in notes, having a valid opportunity cost of like investments is difficult to arrive at. Risk is missing.

I appraised notes, and assessing loan quality is a risk assessment, not primarily a financial assessment. Risk is assessed through underwriting the borrower, the collateral, past performance, amounts at risk and probability of a note being paid as agreed.

I can teach a 5th grader to punch a financial calculator as to the annuity value at a required return to find the present value, that isn't "valuing" a note, that is basically setting an amount one might be willing to pay for a note and comparing present values (to them) between other options.

I'd have to bet that small note investors, portfolios of less than 5 million, simply make assumptions. Thinking that the originator of a note was accomplished by a lending institution and therefor underwritten properly and in compliance is acceptable, if you accept that 10% of those will be improperly underwritten or not compliant, I'd say 15% as you can have both issues. A decent bank will have 2 to 3% of compliance issues but can run much higher if errors were following through the operation on a consistent basis. Making a mistake over and over again.

Most note buyers seem to come from RE, adapting skill sets from that point of view is rather flawed, especially those thinking they will acquire the property as if they bought it. RE is only a collateral matter, Ill mention this aspect to Bill B.

I haven't specialized in NPNs, to say looking for them, they came to me regardless of what I did as people looked for solutions. Banks I dealt with in NPN portfolio were generally looking for a solution that was usually dumping them one way or another. I was doing short sales before Realtors had the term, buying the note is another way to go.

Don't forget to assess the costs of foreclosure, protecting the collateral, holding period, costs of sale and the proceeds from a sale paying the note off. At some point, if you do enough notes (but for the lucky few, it could be your first note deal) consider death and holding during an estate settlement, bankruptcy, law suits, title issues found on your watch, insured losses and settlements and God just saying this isn't going to work as you thought. All is part of your risk assessment and impacts valuation.

In pools, much of this has been done, if other institutions are involved in bidding or negotiation, the asking price may reflect the actual value, these are sophisticated buyers, they have the expertise and staff to value what THEY are looking for. This will be close too in larger loans that investors here will never be involved in, so why go there!?!

The greatest profit potential in notes is not institutional notes of any kind, but privately originated notes or contracts. The originators screwed up, if they are non-performing 90% of the mistake can be traced back to poor origination, the other 10% arise out of the same circumstances that effect all loans, things happen.   

Gotta move on, this is a forum post, not a book.

Bill B. no need for decades of experience in RE. Notes are not an RE activity, it's finance and RE is only the collateral. You do need a market value to assess the level of collateral, so you need to know RE, valuation is critical,  but what you need to know can be learned in, lets say the time required in a college semester, or, if the cash reserves allow and the discount is deep enough, you can hire out the RE aspects, appraisers, BPO, attorney, contractor, inspectors, title folks and a good Realtor can probably cover the bases for you. Most note investors don't want to spend 2 to 5K on top of the price of a note and small notes won't allow you to get in that deep. So, it pays to know.

Sorry for length.

Jay has a good point, it's an NPN craze and it is purely driven by brokers marketing, guruized programs and misconceptions of great returns.

As to exits, it's selling the property after foreclosure, taking a deed in lieu of FC, modifying the note to a better performance level if it has issues and then refinancing or, if it's a clean note refinance it or pawn the thing off to another investor. Your other option is holding to maturity. However, there are other uses for a note too, assignments, pledges, trading and splitting these areas up in whole or in part. Consideration should be given too, that dealing in any NPN, that asset has already crossed the threshold of the note getting pawned off to another investor, think about that, is the buyer better versed in finance and notes than the seller? Usually not. Buying a NPN is much like buying a wrecked car, can you really fix it, buying from a broker where the note is reinstated and performing is buying a wrecked car that has been rebuilt to pass inspection. Both are still wrecks, the value of both are less, the mentality of the borrower has already been tainted and in a different mindset than a more credit worthy borrower. You can make money fixing wrecks and selling rebuilt cars, you may be better off just starting out selling used cars that haven't been wrecked.

The highest yield possible, bar none of any strategy, is to buy a note at a discount and refinance it days latter receiving the UPB or close to it, they yield skyrockets! The longer you hold a note the closer you will be to receiving the discounted yield.

BTW, Will, you probably haven't read all this, but my minimum was 15%, if you can't pull 15% from a discounted note you're wasting time being in notes. And the more dealers there are in line on a note the less you'll get of that pie. Buying from private note holders you're looking at 20%+.  

@Dion DePaoli  hope this is the kind of stuff you were looking for, we are beyond your original questions, if not, I'll pass going further. :)


As an aside if I was on BP and I was a newbie in the note business I would most certainly take Dion up on his DD product for NPN.

for a few reasons

1. affordable

2. you have someone who really knows the industry looking at your potential deal

3. you will get an education as you work with Dion or his company on DD  so you learn for future events.

Even if your only mildly interested in the subject I would bet one would get more out of a DD package from someone who is in the moment real time than a canned course.

Or trying to decipher all the varying opinions one gets on BP  be them pro or con.  Just because one has done a Podcast on BP  the audience must always take that information with a grain of salt... After all these are all just people in the industry with their personal experience's and opinions  ... there is usually way more information or knowledge one needs to pull these deals off than can be transmitted in a 60 minute interview.. Although it does get people thinking and that is good.

NPN is like graduate school no one is going to learn this by reading on BP one really needs to experience it and just do it... So many variables and depth of information that is involved in these transactions

Notes are something about which I've been trying to learn over the past year - it's involved wading through many a Tolstoy-esque post from @Bill Gulley  and several Bawld Guy blogs. 

Thus far I've not found an active market for notes here north of the 49th - perhaps its an artefact of the difference in mortgage financing, but more probably I just have yet to find the correct door.   To-date my exposure has been with writing my own notes - three: one primary & two seconds (amounts conventional lenders considered too small) - from a registered account.  

While the returns are respectable, the lending requirements ties-up a lot of funds.  The enhanced of returns available with purchasing notes at a discount is becoming more and more attractive, but even there the biggest challenge to me is the amount of capital that would need to be committed to acquire enough notes to mitigate your risk.

I've clicked on the "monitor" button and am all ears ... 

Good analogy Jay, I'll take it further. Meeting people is done in Grade School, Sales and Marketing is Junior High School, RE is High School, Mortgage Finance is an Associates Degree, Buying Notes is a Bachelor's Degree, Buying NPNs is Graduate School and Compliance/Law is at the Doctorial level.

To many want to go from Grade School to Grad School. Many with a High School or an Associates degree believe they have a Doctorate Degree. Podcasts can be made by a grade school student, they often sound like the have a graduate degree, it's a public forum!

Glad you tripped that thought Jay, I'll use that again.

If I were starting out in notes I'd certainly try to find someone who had no vested interest in the note I was considering for advice, there may be a small fee, but you'll get an unbiased opinion.

If you just have cash looking for a better place to reside, you could get with a broker, better yet, just learn how to find notes, then have the note assessed or appraised, and get the buyer's side "represented" buy the note, turn it over for servicing, go to the mail box and get your money. If things go south, your loan servicer can probably modify it, foreclosure go to your attorney "Trustee" then see your Realtor.

Dion seems to have a service, I have thought about and assisted others, Dion and I talk,  Ken Rishel is a good compliance guy. Mobile home financing is Ken's niche, gosh, he hasn't been on in so long I can't pull his last name, Marc F. does mobile home notes.

Taking advice from someone who bought some notes in the past is like taking advice from someone who bought a few houses, they may know and then again they may not have a clue.

Understand too that someone with an RMLO license had about 20 hours of training, they could have sold insurance last month. A mortgage broker is an RMLO who has met financial responsibility and office requirements. So, the insurance guy, in some states, can get a license pretty quickly with a bank account and he still won't have a clue.

Maybe what we need is an Angie's List for originators and brokers!

Maybe what we need are real finance classes in colleges pertaining to mortgage financing and notes, I can see where two semesters could cover enough material for people to have much more than a clue. I say college classes as in that environment there are no pitches, no biased promotions of some strategy and the material would be applicable to the entire industry and all facets rather than one sliver of the topic. But I don't know of any schools offering such course. The American Banker's Association comes close, but it's for bankers, not cheap nor is it quick.

So far, Josh hasn't refined his BP school yet, just a guess but I'd guess it's coming, my concern would be the material and who would teach it, I'm sure he's thought of it, how could he not....LOL  He's probably to busy anyway.

Until then, if you can find a business advisor type or due diligence program not affiliated with the subject asset, check that out!


This post is so informative and it is like sitting at the insiders table. I appreciate you guys sharing your wisdom. The sophistication level for note investing seems to be the highest required in the rei business or financial business as Bill notes. I could see notes as the ultimate exit strategy with free and clear holds. Still green but I think I got about 100 years of combined note experience presentation from this one bp post.



Create Lasting Wealth Through Real Estate

Join the millions of people achieving financial freedom through the power of real estate investing

Start here