Note Investing ( A whole new world)
Realtor/Investor · Ft Lauderdale/ Miami Florida · Member since 2015 · 311 posts · 104 votes
Note Investing ( A whole new world)
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Dion DePaoliPro Member
Real Estate Broker · Northwest Indiana, IN · Member since 2011 · 2k+ posts · 2k+ votesI haven't but skipped through the podcast. Most of it sounded like he was just talking about rental property.
That said, as Wayne mentions, the function of paying down any existing mortgage is simply a matter of having the money to do so. Where ever that money may come from.
There seems to be a fair amount of speculation around the matter of prepayment here. First, let's understand that a loan may have restrictions on prepayment. Some loans limit prepayment to no more than 20% per year. Some loans have prepayment penalties. Moral of the story, do not just assume what is talked about in this podcast can be applied universally nor should we assume it is actually prudent.
The effectiveness of the prepayment fluctuates depending on the loan, interest and remaining term. Generally speaking adding $100 to your payment can shave 7 years off a 30 year loan. Adding $200 does not shave off 14 years. We get diminishing results as we increase the prepayment.
Loans which are late term or closer to maturity will already have a higher principal allocation of the P&I payment which acts to accelerate the principal pay down as a function of the normal loan amortization schedule. So coupling prepayments with late stage loans will increase effect of principal pay down. Obviously, that gives late stage loans a leg up on new loans if we apply the same strategy.
We are also missing an analysis as to what is actually a better use of funds. To use capital to purchase a loan to pay down the loan or in fact using the same capital to increase down payment and thus reduce the interest liability over time from the get go. (that is a pretty big elephant in the room really) Larger down payments can result in lower interest which also reduces interest liability over time. There is a point usually around 65% LTV where the rate is as low as it can go without buying the rate down. Speaking of buying the rate down, yea, that comparison is missing too.
What tends to happen in many things "notes" is it is new to the audience and thus spurs a fair amount of speculation. New strategies are simply new to those who hear them for the first time. They are not newly invented. I always like to say, there is no magic in mortgages. You will not find newly develop ideas, you will find old ideas told to you for the first time.
The garbage notes Wayne is mentioning would be loans improperly evaluated by newbie note investors. For instance, the strategy here is to acquire a performing note not a non-performing note as an NPN would have additional capital demands. They do not yield cash flow. So for hopefully nobody ran out and tried to purchase an NPN to pay down another loan as that simply won't work out well.
Investing in loans takes time to really understand and get good. There will be lots of failures alone the way. There is no short cut. The classes that get put on by these guru's are just a bunch of hyped junk talk to try and charge lots of money for little content. My firm has worked with many students from those seminars and I can tell you I am far from impressed. I actually feel sorry for many as they waste money they didn't have on an education they don't get.
We have seen over the past couple years what I like to refer to as "a race to the bottom" due to some of this guru teaching. More and more investors think they can get involved in note investing will smaller and smaller amounts of capital. More and more investors lose on their investment and chalk it off to "learning experience". It's like a wacky brain wash cult. As usual, we are more than happy to take your money if you want to just write it off to learning experiences. Heck, I will even get you a bumper sticker. I digress.
None of this is to create a fear around note investing nor imply that newbies shouldn't learn to invest in notes. Rather, take it slow. Be aware you are surrounded by sharks with an agenda. Consider the fact you are not getting the whole story. In many cases, you are not even getting the right story. I don't have a book you can read. I don't have a video you can watch and poof all the sudden you are a skilled note investor. It takes time and experience. There is no short cut.
The best thing about Bigger Pockets is you can come here and ask questions and while some agendas play in the background you the content can be vetted by those with much greater experience than you. That levels the playing field as much as it will.
Good luck.
48 Replies
- Specialist · Manhattan, NY · Member since 2013 · 116 posts · 192 votes10y
Hi Yasmine,
I learned in 2011 that I had no choice but to learn the note space. Why?
1. Finding motivated sellers was all but impossible
2. Foreclosures were done or being bid up to retail prices
3. Home prices were increasing much faster than rents - so yields got squeezed.
Its even more true today....prices are even higher. I wrote about it a little here:
My next post will focus on how I made the transition from 40 rental homes to 2100 notes in 3 years. It was a very tough journey.....but it was exciting and much more scalable than landlording (not that there is anything wrong with being a landlord - but after 20 years, Id had enough!)
Paul
- Realtor/Investor · Ft Lauderdale/ Miami Florida · Member since 2015 · 311 posts · 104 votes10y
Thank you, I am going to check it out. That is a huge leap. I see your are in New York! Here is South Florida the whole issue with homes being bid up is the norm. I would not stand a chance at an auction. Investors come in and over pay because they can and it strengths the barrier of entry therefore securing there position and investing business.
- Investor and Agent · Fort Lauderdale, FL · Member since 2014 · 30 posts · 11 votes10y
Thank you for the information. What other resources would you recommend to learn about note Investing? Currently my partner and I wholesale/rehab in S Fl but are definitely looking into the note business. Any advice would be greatly appreciated.
- Real Estate Professional · West Palm Beach, FL · Member since 2012 · 23k+ posts · 13k+ votes10y
@Yasmine Bisumber Tread lightly, as NPN's are Way more complicated than straight real estate. There's a bunch of garbage notes out there, and too many new people trying to get in, buying problems.
- Roswell, GA · Member since 2015 · 2 posts · 1 vote10yPodcast episodes 17 & 28 had some good Note Investing content. I'm only on Podcast 31, so there is probably some good content in later episodes that I haven't listened to yet as well. Mike
- Realtor/Investor · Ft Lauderdale/ Miami Florida · Member since 2015 · 311 posts · 104 votes10y
Originally posted by @Wayne Brooks:
@Yasmine Bisumber Tread lightly, as NPN's are Way more complicated than straight real estate. There's a bunch of garbage notes out there, and too many new people trying to get in, buying problems.
I agree, with any new investing strategy I will have to learn as much as I can before even thinking about jumping in. I would like to get information and my gears turning, though. Are you currently investing in notes? Are there any rules of thumb you stick to when it comes to choosing a note to invest in?
- Realtor/Investor · Ft Lauderdale/ Miami Florida · Member since 2015 · 311 posts · 104 votes10y
Originally posted by @Michael Hartman:
Podcast episodes 17 & 28 had some good Note Investing content. I'm only on Podcast 31, so there is probably some good content in later episodes that I haven't listened to yet as well.
Mike
Hi Mike, you are in for a great surprise. The podcasts just get better and better!
- Kalaheo, HI · Member since 2016 · 58 posts · 10 votes10y
@Wayne Brooks, any guidance as to what we're looking for when it comes to "garbage notes"?
Hoping to clarify David Greene's note strategy in the podcast. Please correct mistakes I might have made in these steps:
- Buy a property through a conventional loan.
- Buy a note.
- Combine profits from #1 and #2 to pay off mortgage of #1.
- Mortgage of house #1 is paid off in 5 years.
- Refinance house #1 and repeat.
And here is an image of how I envision it - $ in the house means paid off:
So if I'm understanding it correctly, there are a few requirements that need to be met in order to do this:
- You need enough initial income to buy both a house and note.
- Every asset purchased after a refinance needs to be cash flowing. I would think, then, that a note would be a more logical purchase.
Any thing wrong with how I'm seeing this? We are essentially paying off the initial house over and over and over again?
I can't tag @David Greene for some reason.
- Real Estate Professional · West Palm Beach, FL · Member since 2012 · 23k+ posts · 13k+ votes10y
Well, that's no break through strategy, that's the same as getting a second job to pay down your house earlier. The note aspect has nothing to do with paying down the conventional loan faster. Kind of the same thing as "start a lawn care business, generate extra income, pay your home off faster" or "make money in the stock market, use that to pay your mortgage off faster"......ain't a rocket science theory.
- Kalaheo, HI · Member since 2016 · 58 posts · 10 votes10y
If one were to stop at one cycle, sure, there's no added value here. But when it starts approaching 3 or 4 cycles, the number of assets (jobs in your example, which I wouldn't want to increase) increase and more profit comes in. The main benefit I'm seeing here is a some what quicker acquisition of assets using the vehicle of notes.
I do have my suspicion about notes though. They seem easier than rentals - don't have to deal with land lording issues, capex, etc. and has the potential of the note of being paid off earlier. But I imagine there must be a down fall to it otherwise why wouldn't more investors use it?
- 10yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
@Yasmine Bisumber this strategy of total beginners buying non performing notes especially seconds. Is going to leave a lot of people unhappy.
This strategy and gloss over of non performing notes is by far the most complicated and risky play that an average investor can do.. Your banking on the notes performing and they will in some cases but in many cases they won't and you will have to dump a ton of dough into them and end up with a trashed house.. you cannot change peoples bad behavior ... Having been in the foreclosure rescues business for about 20 years ( before the anti skimming laws made it all but illegal in our area).
people that are in foreclosure will revert at an alarming rate..
So this is a big money play in my mind. you need to buy hundreds of these like @Paul Birkett is alluding to so you can income average..
Remember Pod cast of any nature are just personal opinions and usually by folks with something to sell. So take it all as entertainment and as you state glossed over ideas.. No time to drill into the what can happen.
I was having this conversation last week with one of the most knowledgeable and successful note buyers on this site and we were both commenting how it looks like a flood of newer investors is going to jump into the most difficult and complicated transaction..
One can buy perfectly good performing first trust deeds and make a 9 to 14% yield.. Remember this is all risk reward based why would banks or anyone sell notes for super high yields.. ANSWER super risky.
So if you do this make sure you do it with money you can lose and never get back and just shrug it off.
- Kalaheo, HI · Member since 2016 · 58 posts · 10 votes10y
But Paul's blog post made it sound easy! lol Thanks for bringing in the "down side" I was looking for, @Jay Hinrichs.
So I guess what you're saying is, investors can obtain notes because, well, the banks don't want them. And why do they not want them? Probably because the guys "paying" the notes are a pain. And that pain could be passed on to investors. Sometimes it's a misunderstood pain but a good amount of times, they truly are the real pain in the ***.
A little lost as to why a lot of notes are needed tho.
- Specialist · Manhattan, NY · Member since 2013 · 116 posts · 192 votes10y
@Wayne Brooks and @David L. are completely correct
1. Its much much more complicated than RE - otherwise everyone would do it. Just like building a house is much more complicated than living in one. You cannot learn the note business from free resources or courses or weekend boot camps. You can only learn it by doing. The key question is - how can you "do" without taking on too much risk. The answer is - do it slowly and carefully and repeat it over and over. Note investing is a career. If you think of it as anything else you are likely to make a serious mistake. You will rush into a bad decision and lose money - ask me how I know?
2. The note business is about the velocity of money. Doing it once is fine....but the magic happens when you do it over and over. Once you have your system for buying, fixing and selling notes, you have created a banking machine that throws off a lot of free cashflow every month.
It is by no means an easy business, it's tough to learn, it's complicated to operate....but it is doable. You can learn how to run a note business in 12-18 months by practicing every day. I'd suggest you do it with a partner, attend a course (we don't offer courses - there are many fine options out there) and work with the expectation of achieving nothing but an education in the first 12 months.
It took me 12 months to buy my first 200 notes and 9 months to buy over 1000.
Expert knowledge + right team + practice = confidence
when you have confidence you are ready to scale....not before. Scale before you know what you are doing....and you will lose all your money
good luck with the transition!
- 10yDion DePaoliPro MemberReal Estate Broker · Northwest Indiana, IN · Member since 2011 · 2k+ posts · 2k+ votes
I haven't but skipped through the podcast. Most of it sounded like he was just talking about rental property.
That said, as Wayne mentions, the function of paying down any existing mortgage is simply a matter of having the money to do so. Where ever that money may come from.
There seems to be a fair amount of speculation around the matter of prepayment here. First, let's understand that a loan may have restrictions on prepayment. Some loans limit prepayment to no more than 20% per year. Some loans have prepayment penalties. Moral of the story, do not just assume what is talked about in this podcast can be applied universally nor should we assume it is actually prudent.
The effectiveness of the prepayment fluctuates depending on the loan, interest and remaining term. Generally speaking adding $100 to your payment can shave 7 years off a 30 year loan. Adding $200 does not shave off 14 years. We get diminishing results as we increase the prepayment.
Loans which are late term or closer to maturity will already have a higher principal allocation of the P&I payment which acts to accelerate the principal pay down as a function of the normal loan amortization schedule. So coupling prepayments with late stage loans will increase effect of principal pay down. Obviously, that gives late stage loans a leg up on new loans if we apply the same strategy.
We are also missing an analysis as to what is actually a better use of funds. To use capital to purchase a loan to pay down the loan or in fact using the same capital to increase down payment and thus reduce the interest liability over time from the get go. (that is a pretty big elephant in the room really) Larger down payments can result in lower interest which also reduces interest liability over time. There is a point usually around 65% LTV where the rate is as low as it can go without buying the rate down. Speaking of buying the rate down, yea, that comparison is missing too.
What tends to happen in many things "notes" is it is new to the audience and thus spurs a fair amount of speculation. New strategies are simply new to those who hear them for the first time. They are not newly invented. I always like to say, there is no magic in mortgages. You will not find newly develop ideas, you will find old ideas told to you for the first time.
The garbage notes Wayne is mentioning would be loans improperly evaluated by newbie note investors. For instance, the strategy here is to acquire a performing note not a non-performing note as an NPN would have additional capital demands. They do not yield cash flow. So for hopefully nobody ran out and tried to purchase an NPN to pay down another loan as that simply won't work out well.
Investing in loans takes time to really understand and get good. There will be lots of failures alone the way. There is no short cut. The classes that get put on by these guru's are just a bunch of hyped junk talk to try and charge lots of money for little content. My firm has worked with many students from those seminars and I can tell you I am far from impressed. I actually feel sorry for many as they waste money they didn't have on an education they don't get.
We have seen over the past couple years what I like to refer to as "a race to the bottom" due to some of this guru teaching. More and more investors think they can get involved in note investing will smaller and smaller amounts of capital. More and more investors lose on their investment and chalk it off to "learning experience". It's like a wacky brain wash cult. As usual, we are more than happy to take your money if you want to just write it off to learning experiences. Heck, I will even get you a bumper sticker. I digress.
None of this is to create a fear around note investing nor imply that newbies shouldn't learn to invest in notes. Rather, take it slow. Be aware you are surrounded by sharks with an agenda. Consider the fact you are not getting the whole story. In many cases, you are not even getting the right story. I don't have a book you can read. I don't have a video you can watch and poof all the sudden you are a skilled note investor. It takes time and experience. There is no short cut.
The best thing about Bigger Pockets is you can come here and ask questions and while some agendas play in the background you the content can be vetted by those with much greater experience than you. That levels the playing field as much as it will.
Good luck. - 10yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
@David L. So David lets put it another way... @Dion DePaoli Dion as always has given a very eloquent response and reality post.
But lets say your sitting In your place on Kauai ... and you bought some NPN lets say a second.. since those are touted by some who have done pod casts on BP...
And so this second is sitting in the rust belt.. ( were a majority of this stuff is) So what next.
how do you contact the owner.. write them a letter... try to call them. what if they don't respond.
So lets say it all goes great they respond to your letter you figure out how to do all the proper paper work to modify the loan.. and they start paying then in 18 months they stop and go dark.
Now you have to try to contact them. by law you can't start foreclosure for 120 days.. so you lost that income. if its a mortgage state you have on top of that at least 8 to 18 months to take it through the court system.. all the while the folks are living there for free..
Maybe you can bluff them and get them to do a deed in Lui maybe not.. since they already went through this with the first lender they kind of know there rights.. maybe like a professional tenant.
So you do all that and since your in second position and the first won't talk to you .. now what.
so lets say you work through all of that and you foreclose.. your in Kauai and the asset is in Ohio. who is going to go over there and assess it .. your going to have to pay someone.. what if the people won't leave then you have to evict what if they are upset and trash the house.. etc etc.
So I think you can see were there is a ton of work in this and for a passive investor sitting half a world away .. there are just far better plays.. ONe as said is simply investing in performing notes.
there are very reputable HML in Hawaii that will get you 10 to 12% and you don't run all these risks and what to do if they don't pay.. or you can simply originate your own loan there as well. NO licensed required in Hawaii for commercial purpose loans.
So this is probably not anything that was talked about on any pod cast they just talk about Blue sky I get it I am a sales guy through and through.. LOL..
- Kalaheo, HI · Member since 2016 · 58 posts · 10 votes10y
Thank you gentlemen. Now that was the kind of answers I was hoping for! Those were great eye openers.
@Paul Birkett, thanks for sharing your experience and the reality of note purchasing. To hear you say that note investing is a career pushes me off this topic a bit. REI at this point in time can only be a side thing for me. So I'm glad you've showed us a real life perspective for us.
@Dion DePaoli, I know exactly what you mean by those "workshop" guys. I've seen them in all industries - not just REI. They've gathered some experience in the field and then start to "share their experience" and make money off their own kind (other investors). Not to dog on all people who do this, but I've seen many who do it poorly. It is because of these types of "workshops" that I am cautious and asking the questions. So far, the only legitimate short cuts I've seen don't really get you much ROI.
@Jay Hinrichs, you paint a very hands on picture there. Quite the contrary to what I imagined. It seems to be that most of the problems come from notes in a position lower than 1st. Is there a reason why 1st position is not as frequently acquired? And I might be going over my question limit here, but not entirely understanding the connection with the HML example you presented there?
- 10yDavid GreeneBusiness MemberReal Estate Broker · San Francisco Bay Area, CA · Member since 2012 · 225 posts · 266 votes
Seems like there is quite a bit of confusion over a topic we touched on in the podcast. I'd like to give some clarifying information so everyone can settle down a bit.
I do buy notes. However, as very clearly portrayed by Josh, I am not doing any of the work to rehab them. I am buying a note that someone else, an expert, has already made performing. I buy notes like this as a supplement to my rental strategy, not as the meat and potatoes. Notes have advantages, they also have disadvantages. If someone somehow got the idea that buying non-performing notes with no experience is going to make them rich, they clearly weren't listening to the podcast.
Furthermore, the notes I buy come with a warranty. The company who sells them to me will buy them back if they stop performing. I will get all my money back, and my only loss will be the time spent that money could have been earning me interest. I did not mention this on the podcast because I am not pushing notes-just sharing my investment strategy.
I do not in any way "sell" anything or have anything to gain by referring to the notes i've added to my portfolio.
Before I buy a note, I know the interest rate, monthly payment, point in the amortization schedule, credit of the person paying it, value of the house securing it, etc. This is standard homework anyone should be doing before they invest in anything.
As far as using the notes to pay back the loan on a mortgage property-yes, this money can come from anywhere. In the example I give on the spreadsheet on my website I have the word "note income" but it doesn't really matter where the income comes from. Money is money. The point of the spreadsheet is to show how compound interest works over time. It is not a "note calculator". There is no way on the spreadsheet to determine when a note pays off early, this is a huge factor in your IRR and if it was a note calculator it would have been included.
As far as prepayment penalties on mortgages, again, this spreadsheet is meant to show compound interest, not be used as a retirement guide. Yes, you get diminishing returns as you get closer to the end of the loan. In reality, I would not be paying off the loan on ONE house with all the income I end up generating. It wouldn't make sense to pay off a mortgage in 3 months now would it?
You would end up using the money pull out on mortgage to buy more investment property. The spreadsheet shows the context that you could conceivably build up all that wealth from making one investment and just setting it ride.
@david L, Sorry, I'm having a tough time getting this to tag you as well. But yes, you have the right idea. In the example on the spreadsheet you would buy a house with cash, pull the money out and reinvest it at a 12% return. It could be in notes, houses, or a whole bunch of landscapers running around with lawn mowers as someone mentioned, it doesn't matter.
In case it wasn't obvious, the spreadsheet is set up to show easy, convenient investments. Not trying to get top dollar. Buying warranted, performing notes with the money you pull out is about as easy as you can expect to see. Assuming rent never increases, home prices never increase, and the note never pays off early is about as conservative as you can get. Even in spite of all those obstacles, the compound interest from ONE investment you make after a few years of saving can be mind blowing. Even if you only do one thing right, it can be huge for you.
I honestly had no idea this whole "note" thing would take off like it did. I'm glad to see more people are researching a new asset class as it can only be good for you to keep educating yourself. However, it's not some secret niche no one knows about that can make you rich with zero effort or risk. Those types of things do not exist (unless you believe in bitcoin or bought apple stock like forrest gump). I would recommend the people who are discouraging the questions being asked about notes go and listen to the podcast first, as nowhere in there do I indicate that anything less than hard work, focus, and sacrifice will lead to success.
Hope this helps clear the air a bit. Quite a few assumptions being made regarding my stance on this, most aren't accurate. If anyone would like to know more about what I think, why I think it, and how I came to think that way, feel free to ask!
And seriously, why can't we tag anymore? Haha
- 10yDon KonipolBusiness MemberInvestor · The Woodlands TX / Avon, CT · Member since 2009 · 6k+ posts · 10k+ votes
Buying, or investing in non performing notes is a BUSINESS, and a business that requires significant time, knowledge, ability and managerial skill.
Buying or investing in performing notes is an INVESTMENT, and can be successfully done with a much more limited time involvement, less specialized knowledge, and no managerial skill.
IMO, these two endeavors are so different in so many crucial aspects that their relation by virtue of the underlying product being debt secured by real property only serves to mislead novices
- 10yDion DePaoliPro MemberReal Estate Broker · Northwest Indiana, IN · Member since 2011 · 2k+ posts · 2k+ votes
@David Greene
Thanks for swinging by for the topic and giving some input. Hopefully you understand nowhere in here is anybody attacking you as a person. Often times when the podcasts cover topics related to note investing they get widely misinterpreted. As those concepts make their way to the boards those with more experience, even to that of the podcast participant, end up commenting on the board topics in an effort to bring reality back to the table.
I didn't realize there was a spreadsheet. I have taken the liberty to download it and review it. I will add, if you put something out there like this for public consumption it will get critiqued. I am sure much of this makes sense to you but we have many improper assumptions and errors which cause the accuracy of this spreadsheet model to not be so great. Misleading even.
Some of this is hard to discern what is happening because you are using terms unique to you not industry terms. In the Mortgage #1 slot we have what looks like the purchase of real property for $125k. $25k is put down and $100k is borrowed at 4.5% interest. There is no mention of term. I will assume you are working with 30 years. There is a field labeled "Mortgage Expense" - I think that is supposed to be the actual mortgage payment due but it is wrong. The mortgage payment of the loan you borrow on the above terms would be $506.69. So from the get go, the sheet calculation is off by $132 per month or $47,406.71 over the life of the loan. The actual PITIA obligation each month is $701.69 you have $570. As such, the monthly rental profit is also wrong and should be $298 not $430.
The calculations you are using to define "Monthly Note Income" are also not correct in "Mortgage #2". Interest income is a function of the on-going and ever diminishing balance. In period 1 the balance of the loan, is $100k, if a payment is made in period 1 the loan balance in period 2 will be reduced by $28.61 which is the principal portion of the loan payment for the borrower. That also means the interest income from that payment will be less in period 2 than it was in period 1. Over the life of the loan that discrepancy is $89,699.47 That is for a 30 year loan.
It is important to point out, that the remaining terms of the note investments matter greatly here. Those number of payments will influence the actual interest income allocation from the loan. Shorter terms will have lower interest income and vice versa. I am still assuming everything, for conversation sake, is 30 years though that is likely not reality. So variations here could be much worse than illustrated here.
When we look at the combined investments in reality you do not "make" any money from the loan investment. 100% of those payments are being allocated to pay down the mortgage. So the profit margin (not considering vacancy and repairs) is the same in both investments really. You do not have a profit of $1,430. The $1,000 you get from the note investment is being spent thus it is not contributing to any profit at all. The profit is $298 per month. The same as it is from the stand alone investment property. So at face value, we have a lower return in near term cash flow than that of simply spending all our cash on the real property and freeing up more actual return dollars.
By prepaying $1,000 per month we will bring the term of the borrowed mortgage down to 6.5 years. It looks like you have 5.8 incorrectly. The loan over the course of those 78 periods costs $15,208 in interest. You will earn a total of $23,268 not including appreciation from the real property.
If you pay all cash for the property, since it is the same $125k invested, and enjoy the $805 profit each month over the same period of 6.5 years you will earn $65,790.
I understand that the sheet may not be real deals and the data left over in the download can change and thus the results can change. However, some of the points this post illustrates should sink in. Some of the strategy here is misleading for near term results. Now after those 6.5 years, where we have 23.5 years of mortgage payments left to receive and an infinite amount of rental income THEN we have acceleration of our investment dollars. Not before.
In addition, none of this is actually "compounding" per the actual definition. The $1,000 interest income from the note investment is not causing additional return to generate. It is simply being spent. True compounding would be taking that interest income and actually reinvesting to make more return. This strategy is not doing that, it is simply paying a bill. Even after the real property loan is paid, the note investment doesn't compound since those funds are not actually being reinvested into a new asset which generates its own return.
I hope for some of the readers that adds some insight to all of this. None of this is a determent from pursing both assets as investments. None of this is picking on David. There is investment wisdom in diversifying your portfolio. Notes which perform can provide nice passive income. You can choose to use that income as you wish to achieve your goals. When you stack the comparisons up while mixing asset investments make sure you fairly compare what is taking place. Risks are different among different assets. All of it can get pretty complex real fast. Make sure the conclusions you draw are supported by the data.
Good Luck. - 10yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
@David Greene your note seller who guarantee's to buy them back what happens when they have a run on the bank and can't pay you back.. And in essence your not buying a note your buying a security... are these sold through securities offerings..
There are many great HML in the Bay Area you can park your funds with and go in on performing 1sts. that pay 12% many regional one's as well.. Why would you recommend people step into the most risky of all note investing.?
I have a ton of experience with foreclosure rescue homeowners over the last 20 years.. The Idea that someone should buy a note that had a buyer default and now is re performing and is somehow a quality note can't agree with that based on my experience in the trench's and actually doing this a few 100 times with homeowners. But I realize this is just Real Estate Soup De Jour.
- 10yDion DePaoliPro MemberReal Estate Broker · Northwest Indiana, IN · Member since 2011 · 2k+ posts · 2k+ votes
Originally posted by @Jay Hinrichs:
@David Greene your note seller who guarantee's to buy them back what happens when they have a run on the bank and can't pay you back.. And in essence your not buying a note your buying a security... are these sold through securities offerings..
I am pretty sure the Seller is PPR. I don't hear of any other firms offering to warrant notes. I believe he mentioned Jeff Brown in the podcast who has something to do with PPR.
The security statement is true but a matter of concern for the Seller. "Guarantee" is a bad word. - 10yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
@Dion DePaoli in the day and I know I am a dinosaur but we sold notes with an endorsement on the back that simply said with recourse.. which means if it went bad the buyer of note could recourse against us.. which would include paying it off in cash replacement or if we could not pay they would sue us.. LOL
Yes I have always since day one on the PPR note program asked about this guarantee.. and I have one client that invested there and the guarantee ( according to what he told me) was not a money one but a replacement one. So I suppose the next question is when Note's of like kind dry up and the sponsor can't buy them for next to nothing like NP seconds are worth in the rust belt.. what happens to the guarantee or replacement deal.
This totally smacks of false sense of security for the investor.. I am sure they have penciled whipped their docs to be in compliance I am not saying they have not.. but the investing public is pretty naïve when it comes to these issues..
However you have this person touting this on a BP pod cast and we know the listening public is very susceptible to taking whats said on BP podcasts as 1000% accurate.. So the listeners are thinking they can just go buy this junk paper and not worry as its guaranteed as @David Greene mentioned on the pod cast or at least in his response on this thread..
So to further the note paydown point.. the problem with the whole concept is your buying highly risky notes that may or may not pay down.. if it goes bad and your using this company and they can't replace then your whole strategy went poof.. and you would be better off buying a lawn service..or a subway or a rental or what have you.
- 10yDion DePaoliPro MemberReal Estate Broker · Northwest Indiana, IN · Member since 2011 · 2k+ posts · 2k+ votes
I am not sure what the actual terms are @Jay Hinrichs, nor do I overly care to be honest. There would certainly have to be an erosion of yield as I am guessing delinquency is not immediate grounds for a swap. That aside from logistics of service transfer and perhaps any due diligence on the replacement loan. That said, I could see how due diligence on the replacement note is not performed based on the underlying idea of a warrant.
None of that is how we would suggest to trade but to each their own.
I believe David is a full time police officer, so hats off to him for the service he provides. Further, hats off to getting involved in REI. I do not for any second think he is advocating excessive risk. In addition, some of that risk may not be fully understood as I get the impression note investing is still fairly new in his arsenal. Evolving from real property into notes is not a bad thing neither is diversity in portfolio.
In this thread and the spreadsheet (as I mentioned I didn't listen to the whole podcast) I didn't find any evidence of the exact nature of the note investment. Not sure if it is a first or second lien. It was mentioned above that the loan was either modified or reinstated. Further, we don't know what price level the investment is at so it is hard to compare to HML not knowing how much equity protection the investment may nor may not have. I would hope if we are spending $100k it is not on a second lien earning 12%. However, he didn't mention, that I heard or read, how much the investment is either. All that said, details matter and we don't have them all.
David is not marketing the note sales. So let's not condemn him as if he is. He is talking about what he is doing and now we are discussing some details related to that. I would hope our board discussions simply add contrast and perspective to the topic matter of note investing that can benefit anyone willing to consider the topic. - 10yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
@Dion DePaoli OK not having ever listened to a single pod cast.. and having you explain the relationship and experience level .. now I get it..
The pod cast then are generally antidotal about what others are doing and basic big picture stuff to get people thinking.. And then we can talk both sides of the content .. the blue sky feel good and then the reality in practice.
- 10yDavid GreeneBusiness MemberReal Estate Broker · San Francisco Bay Area, CA · Member since 2012 · 225 posts · 266 votes
Thank you for clearing that up. As I read most of the comments directed towards my "strategy", I've been having a really hard time understanding where they are getting that information from. Seems like assumptions were made about things I said and arguments were made to counter the assumptions-but I never had anything to do with most of what is being said.
Regarding the compound interest calculator, when I had it built I was considering taking a HELOC out on a property I owned free and clear. The HELOC I was going to take out was interest only. What you see on the spreadsheet is an interest only loan. The principal is not included in the payment, therefore the payment amount is lower than what it would be should it be a fully amortized loan. Big picture, this ends up as somewhat of a wash as the principal payment that is not included would just be taken away from the mortgage balance anyway. The spreadsheet is not an investment strategy. It is a demonstration.
I've also said several times now that it doesn't matter where the 12% income comes from that you reinvest with the mortgage. Notes are an example. Fill in anything you like, everyone is different and has different experiences and strengths when it comes to investing. This table does not represent my "strategy". It illustrates how any layman can build wealth by making one solid investment and investing the returns.
The "compound" affect does not come from the money generated by the "notes" in this example. It comes from earning interest on the money you pull out from each mortgage you take on the property. Reinvesting your return is a very general idea of compounding that anyone can understand, and I think its important for people to see the power of saving and investing your returns and what it can bring.
In the example the spreadsheet offers, you put the note income back into the mortgage because its easy. Not because its the best return you can get. The entire system is designed to encourage people who are not used to saving/investing to get started. The people commenting on this thread seem to be pretty experienced in what you do. That's great. But I would hope you're able to recognize the difference in yourselves from the typical American who doesn't know what they are missing out on by spending their money on cars, lattes, clothes, and cable.
Please, read the things I've said or take the time to listen to the podcast before casting assumptions on what I'm saying. I do not claim to be a note expert and never did, however, every single example that was given regarding what can go wrong with a note can also go wrong with a rental property-or a subway, or a lawn service business, or anything else. There is risk in every single investment class and different amounts of work as well. Most inexperienced people would do much better off investing with a company experienced in the asset class they are buying than trying to do it themselves, and that I WILL advocate.
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