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)
Most Popular Reply
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
- Investor · Brooklyn, NY · Member since 2016 · 38 posts · 6 votes10y
@David Greene wasn't selling anything he just mentioned what he was doing. He also mentioned he puts in 80-100 hour weeks and banks all that money since his rentals pay for all of his expenses. The money can come from anywhere to pay down the rentals, but if he gets the return on the notes thats better than having to cut lawns or running the risk of being shot etc.
- Investor · Chico, CA · Member since 2015 · 10 posts · 1 vote10y
@David Greene I enjoyed the podcast...and I even listened to it! I heard a hard working guy that was determined to change his future instead of complaining about circumstances. It takes a huge amount of courage to lay your business out there like that. Thank you!
I use the same note "strategy" within my portfolio. There's no secret sauce here, just another way to play and maybe add some diversity to the portfolio. I didn't hear anything about NPLs in the podcast...purchase of re-performing, yes, but not that David is doing the work out. Not sure how all that talk came into this thread.
If I say I invest in turnkeys, a potential investor would be wrong to assume EVERY turnkey is awesome! Paper is the same. Amazingly, I'd still take the note warranty over Wall Street any day...but without equity, you are investing in the selling company, and not the asset when that's the exit strategy. (That being said, I'd sleep just fine with VanHorn at the helm).
Just wanted to say good job, sir. I'm sure you'll inspire more than you'll know.
Ryan
- 10yDavid GreeneBusiness MemberReal Estate Broker · San Francisco Bay Area, CA · Member since 2012 · 225 posts · 266 votes
Thanks Ryan! And thanks for actually listening! I'm way too busy to try and buy a NPN. Glad to hear you're using some of the same strategy. Keep me up to date with how things are going for you.
- 10yDion DePaoliPro MemberReal Estate Broker · Northwest Indiana, IN · Member since 2011 · 2k+ posts · 2k+ votes
@David Greene
They may sooner or later have to develop a disclaimer sent to podcast interviewees that you will be talked about and it will go six ways from Sunday. Nature of the beast to some extent.
We have had some healthy debates on the evaluation of risk and return among different asset classes on the boards before. That is a good thing as it means the investment community is growing in skill. That said, when we do evaluate we should take every measure to ensure we analyse the asset correctly or we may suffer from misleading results.
If the loan is interest only once the I/O period is over you will have a greater payment obligation in order to pay the loan to zero in the remaining term. So a 10 year interest only period on a 30 year loan leaves 20 years to pay the principal to zero. Adding that principal back into the payments will make the payment greater than what it would have been in the 30 year amortization. That is just how the math works.
While I can appreciate the layman's need to be exposed to ideas such as compounding it doesn't mean the definition of what compounding is changes. Much of the time the layman uses a word they think is best unknowing the word has a specific meaning in the context of investing. Mortgaging a property to pull cash out and using that cash in an alternate investment to generate a return would be offsetting not really compounding. If the mortgage costs 4% and the return is 10%, I offset the 5% cost and made return in excess of 6%. I didn't compound unless I used the income from the property to make the investment. There is a difference. That difference helps us construct models to compare or analyse strategies to choose what is best. Words translate into ideas and understanding and it is important to have a firm grasp on them.
At the end of the day, this is all good stuff. A healthy conversation around diversifying portfolio among different assets and some of the variety of ways that asset mix can improve a portfolio's performance. Most folks want to do better and have better tools to do better. I just wanted to give you some feedback on the spreadsheet model to hopefully help you or anyone else try and improve it. Those lessons and that feedback are difficult to come by in the world at large. I hope in some manner it helped you and anyone else who cared to read. - Bolingbrook, IL · Member since 2015 · 46 posts · 11 votes10y
Thanks for the good discussion, I'm learning a lot listening in as I figure out my next steps.
- Investor · SF Bay Area · Member since 2016 · 78 posts · 16 votes10y
Thanks for hopping in to clarify, @David Greene. I used to read a lot of biggerpockets forums but have realized over time that the a ton of people who post here throw negativity and "worst case scenarios" in forums to "show people a reality" when in fact these comments just dissuade people from certain types of investments and strategies.
Yes, worst case scenarios happen to investors and they should be known. However, if these people commenting took a positive spin on things they would highlight the amazing possibilities that come with note investing and other types of strategies along with the trials and tribulations.
The whole point of the biggerpockets forum is to share ideas, thoughts (negative AND positive ones) and educate each other as much as possible. Sharing horror stories and expressing how difficult a certain strategy is isn't helpful when it isn't also combined with how amazing some of these opportunities are.
There are definitely some rough situation involved with NPN's. But you know what? There are people making MILLIONS with it. So if you work out the kinks and overcome the obstacles, there's a lot of opportunity and riches ahead for you.
Let's please limit the horror stories if they aren't accompanied by success stories.
- Member since 2019 · 16 posts · 2 votes6y
As a soon-to-be note in nves tg or I greatly appreciate the jnsights learned from these posts. They've provided the seasoned reality I been looking for. The local note investors' group in South Bay area of CA of 14 is mostly newbies with less than one to a few years. One gas 4 years and one has 6 years. Mostly NPN's.
I've been researching note investing through REIC networtking, books, podcasts and BP posts for a year, most intensely the past 3 months now that I finally have investment capital ($22K).
The info gained here has provided valuable clarity. Everyone's perspective has provided something valuable i would not otherwise have thought to consider. Special thanks to Don DiPaoli, Jay Heinrichs (I apologize in advance for name mispellings) for the "reality check" of possible pitfalls in NPN investing, by breaking down what timelines, note guarantees/replacements, early loan payoffs, diminishing interest payments, etc.really look like.
And very impirtantly, the difference between running a note business and note investing.
As a former buy and hold SFH investor disenchanted with rental property issues, the higher returns, lower stress and passivity of performing paper profits beckon and have become my goal.
There is such an abundance of info I've been distracted and confused daily during the past 3 months from my goal-with matters and concepts such as the following: Which entity: C Corp, LLC or a trust to invest through? Which state for my entity-CA? WY? NV? DE? MA? WhIch type of trust or LLC? Revocable trust? Land trust? Series LLC? Separate LLC for each note in the state it's located in? Separate trust for each note? Make the LLC the trustee of the trust? Make the LLC the beneficiary of the trust? A separate bank account for each note? Whew! No two half hour or hour long advisory consultations with professionals have been the same (Anderson, Fortune Builders, M2, Royal, Note Assistance Program, Robert Hall Tax Advisors, EquityTrust, note funds, nite crowdfunding and individual note mentor/investors).
Just a quick and dirty adding of the costs I've been told about but not spent so far would use about $13,000 of my $22,000 note investment stake before I even pop urchade a note.
On what you ask? Consider the following: consultation fees (for "next level", customized business set-up ($149 to $479), entity costs ($600 each for a CA trust and CA LLC with a bare bones firm to $5,750+ for a multi-state C Corp / LLC / Trust set-up) at a full-service legal, accounting and business advisor firm, reserves for ongoing entity maintenance costs, transaction costs and fees, CA franchise tax, service providers (regIstered agents, P.O. box, note servicer, note PMI and title insurance, possible legal fees for loan workout or foreclosure letters fee from lawyer if NPN defaults, 2-day note training seminar of $3,500-$7,000 and miscellaneous costs (transportation to meetings or meals at all day semnars, books, due diligence "boots on the ground" fee for researcher of properties for OOS notes.
I'd roughly have only about $7,000 left to purchase a partial note or to partner on a JV deal.
I'll have an ongoing $1,000 to invest each month and prefer to avoid borrowing. As it is NOT earned income, I can't use a SDIRA.
After the info I've learned from reading this thread, purchasing performing notes as an INVESTOR imakes more sense for my goals for passive, sready income rather than creating a business buying NPN's. My purpose for the note ernings will be to supplement retirement income.
Any comments are welcome. ESPECIALLY regarding what entity (ies) and where and note-friendly professional: lawyer, CPA?
Also, an investor group focused on performing notes in Southern CA.
Thank you in advance for your insight and wisdom.
- Specialist · Fort Worth, TX · Member since 2014 · 528 posts · 226 votes6y
Your 4th to last paragraph where you stated you want passive steady income is what stood out to me the most after you described all the things you’ve researched and what has led you to this decision.
I applaud you for the efforts in truly understanding note investing vs note business and all the things that come along with each.
Based on your conclusion, what are your expected returns?
- Investor · California, CA · Member since 2016 · 367 posts · 375 votes6y
I think you are putting the cart before the horse with all of your LLC entity structure concerns. First you need to figure out how note investing works, and what you want to do IRT to notes. The LLC stuff can wait. You don't have to have an LLC to invest in notes. The main reason is to keep your personal name off of recorded documents. That can be done pretty inexpensively BTW. Also it's $800/yr for each CA LLC, not $600. If you want to start a notes business you are going to need more money to get started. You should do some investing in notes first, before thinking about starting a notes business. There is an awful lot to know, and there is no one place to learn it, it mostly comes with experience.
Regarding the So Bay Area Notes meetup, I used to go to that hoping that it would be useful, but I found it to be a waste of time. The same people usually show up, they all seem to be tire kickers that never actually invest in notes, there was rarely any useful knowledge presented. kind of a joke. I know there is a new lady running it now, maybe it's better? I doubt it though.
]
- Investor · VA · Member since 2015 · 21k+ posts · 19k+ votes6y
@Tim Simmons you are 100% correct. I constantly see people spending huge $ and countless hours trying to set up these complex organization structures which are more fit for a $1B private equity firm when they have not bought anything. The WORST place to also get this information is from “guru’s” selling you these fancy corporation document packages as it’s like the car dealer selling you under carriage protection.
Find a local attorney and talk to a few of them. What is also best for me is not necessarily what is best for you as each persons situation is different (for example if your single, own no real estate and have no assets why do an LLC as you have nothing to lose and do a some proprietorship with a dba.... one thing that I also shake my head at is people may say they setup an LLC to hide their name - well if the borrower defaults you need to sign paperwork, so guess what - your name isn't that far hidden.
7e investments53 Reviews - Member since 2019 · 16 posts · 2 votes6y
Thank you Laren, Tim and Chris, for responding.
Laren, I've heard that I can expect to earn 10% -12% in general on performing. Maybe more; up to the high-teens. Possibly in funds or trust deeds, indivudually or thru JV deals.
QUESTION: What return percentage SHOULD I be expecting?
Tim,
Yes, it's $800. That was a typo. Your assessment of the Notes networking group is what I've started to feel. Also, a majority of the "investors", 3/4 of whom have not yet bought a note, but have either JV'd on one or invest in rentals and are like me, transistioning to notes. They are looking to JV with a money partner. They offer to do the due diligence. EVERYone says a LLC is needed to do a JV deal and also say absolutey NOT to purchase a note in my own name.
QUESTIONS:
-You're saying as an investor, rather than as a business, it's O.K then to do a sole proprietorship with a DBA? That no asset protection is needed through a LLC or trust?
-Also, how much money IS enough to start investing in performing notes?
-Can you recommend a note-friendly local attorney and a CPA that you use or know of here in the CA South Bay area?
I'm definitely no longer considering pursuing notes as a business-only as an investor. I definitely prefer a simpler option to the multidimensional entity structures I've been told about. Performing notes will be my focus as they are much safer and predictable than risky NPN's. Even if the returns are less than what I've been told to expect, performing notes are collateralized and thus more tangible than stocks and provide higher, steadier returns.Chris,
QUESTION: What course of action do you recommend? Thanks for pointing out the identity exposure which would occur in a foreclosure.
Anyone, please respond. All reples are welcome.
Information, recommendations and explanations of why/why not and pros/cons are especially helpful.
Thank you.
- Specialist · Fort Worth, TX · Member since 2014 · 528 posts · 226 votes6y
The reason I’m asking is to help point you towards a fund IMO. There are a number of funds out there offering 10% from reputable people in the industry.
If you willing to put 22k in to an active note buying business knowing that more than half is going to entity setup, formal education/workshop and other misc. costs all while trying to be passive and get a return from 10-12% I would simply put all 22k to fund.
You can get your 22k working immediately and forgo all of the unnecessary costs to be setup as an “active” note investor. Unfortunately it takes quite a bit money to be active.
- Member since 2019 · 16 posts · 2 votes6y
Thank you Laren, Tim and Chris, for responding.
Laren, I've heard that I can expect to earn 10% -12% in general on performing. Maybe more; up to the high-teens. Possibly in funds or trust deeds, indivudually or thru JV deals.
QUESTION: What return percentage SHOULD I be expecting?
Tim,
Yes, it's $800. That was a typo. Your assessment of the Notes networking group is what I've started to feel. Also, a majority of the "investors", 3/4 of whom have not yet bought a note, but have either JV'd on one or invest in rentals and are like me, transistioning to notes. They are looking to JV with a money partner. They offer to do the due diligence. EVERYone says a LLC is needed to do a JV deal and also say absolutey NOT to purchase a note in my own name.
QUESTIONS:
-You're saying as an investor, rather than as a business, it's O.K then to do a sole proprietorship with a DBA? That no asset protection is needed through a LLC or trust?
-Also, how much money IS enough to start investing in performing notes?
-Can you recommend a note-friendly local attorney and a CPA that you use or know of here in the CA South Bay area?
I'm definitely no longer considering pursuing notes as a business-only as an investor. I definitely prefer a simpler option to the multidimensional entity structures I've been told about. Performing notes will be my focus as they are much safer and predictable than risky NPN's. Even if the returns are less than what I've been told to expect, performing notes are collateralized and thus more tangible than stocks and provide higher, steadier returns.Chris,
QUESTION: What course of action do you recommend? Thanks for pointing out the identity exposure which would occur in a foreclosure.
Anyone, please respond. All reples are welcome.
Information, recommendations and explanations of why/why not and pros/cons are especially helpful.
Thank you.
- Member since 2019 · 16 posts · 2 votes6y
Hi Logan, so sorry about the wrong name for you in my previous response.
I have considered note funds. I have been looking for a good one with transparency of its note holdings (i.e. a listing of the properties, their locations and ratings of them, such as A, B or C), a solid track record of earnings, no requirement of being an accredited investor, a holding period of less than 5 years (3 years maximum preferably), a highly regarded management and low fees.
Also, what return percentage should I be expecting?
Do you have a recommendation, please?
Thank you.
- Investor · VA · Member since 2015 · 21k+ posts · 19k+ votes6y
@Valenda D.
If you are looking to invest passively then buy a partial. You will lose a few points from a performer but it will save you $ as you don't need a LLC if you pick the partner who handles the servicing and doesn't record it in your name.
That would be my recommendation. You also don’t have the costs of pulling title reports, bpo, do the accounting etc. that is all done for you.
Figure that will cost you including the LLC say $1500.. a $50k investment at 12% yields 6k whereas 9% yields $4500. That is break even but on a partial if it goes non performing it shouldn't be your problem. A lot less risk for the same cost. Most people only look at the rate they get and forget to account for all the overhead costs involved.
Just my 2 cents.
Btw if it’s a performing note (not cfd) above 12% return is very difficult to find.
7e investments53 Reviews - Investor · San Diego, CA · Member since 2019 · 286 posts · 135 votes6y
Great discussion, and I have to agree that the NPN space is not all rainbows and unicorns. One has to have a vast network of professionals and resources to deal with whatever comes up.
I bought my first note (NPN) because I wanted to learn all the work involved in the foreclosure process, and while im learning a lot, it's taking a lot of time and resources (judicial state). Sometimes I wish i bought a performer as my first so I can build by capital back.
- Specialist · Frederick, MD · Member since 2017 · 474 posts · 454 votes6y
@Valenda D. - Are you located in the Bay Area of CA or Southern CA?
- Investor · California, CA · Member since 2016 · 367 posts · 375 votes6y
@Valenda D.
I wasn't saying you don't need an LLC, the point was it's doesn't need to be your top priority, and you shouldn't get bogged down by that issue. Yes, when buying notes it should be in an LLC to keep your personal name out of the public records. Depending on how the JV deal is set up, may not need the LLC.
Yield on performing notes has been coming down, 10% is possible still I think, hard to get much more.To invest in NPN's, 1st position, I'd say you need at least $25k-30k. Anything less, you'll be buying low value assets in high risk areas. CDF's are cheaper.
I'd suggest starting out buying a partial with someone trustworthy, invest in a fund, or doing a JV deal. Make sure you vet the person you are investing with very carefully. Chris S. would be a good choice. - Member since 2019 · 16 posts · 2 votes6y
Thank You Chris, Wesley and Tim.Your insights and advice are really helpful.
Cfd or CDF? Chris and Tim, I saw the reference you made to cdf and CDF and Googled some BP posts as I was unfamiliar with them. I discovered Dion D. and Bill Gulley's in-depth commentaries in a post: "The Pain$ of Not Knowing About CFDs". Their comments are chillingly instructive. Scary! CDF's seem way too advanced for me at the present time.
I will heed yout recommendation to consider partials and JV deals. Thanks for those tips of what to look out for.
Tim, you mentioned CDF in your post - was that somthing different? I thought it was possibly a typo.
Marco, I'm in So. CA.
i will get a basic LLC here in CA. I spoke with the four investors in my South Bay, CA (Torrance-based) note investing group who actually have notes. The three sharpest have been noting for 4 and 6 and 9 years. The other one for I year. Two most successful have CA LLC's after previous experience with OOS LLC's. The newbie in NV, and the 6 year investor's IU s based in WY or UT.
Last night I've learned of and accepted an invitation to a local (Long Beach, CA) note group meet-up next week, just 2 miles from home.
Wesley, your experience is very helpful. There is so much to know. Thank you for sharing. I will proceed with caution
I will also just keep saving and building up my investing capital.
QUICK QUESTION: Shoud I borrow to invest in notes? A line of credit from Wells Fargo was offerred when I inquired about opening a business checking account.
I haven't applied yet, was just asking about the checking account and the rep asked if I might be interested. I said maybe, I'd let her know.
- Investor · VA · Member since 2015 · 21k+ posts · 19k+ votes6y
@Valenda D.
DO NOT BORROW. Once you get a lot of experience then the answer may change, but I highly recommend against getting lending starting out as you will have to personally guaranty that money
7e investments53 Reviews - Member since 2019 · 16 posts · 2 votes6y
Thank you Chris, I wiil NOT borrow. It's too risky.
- Specialist · Frederick, MD · Member since 2017 · 474 posts · 454 votes6y
@Valenda D. - I'm in Southern CA also. There will be a panel of note investors at the OCREIA meeting on Thursday night. Their backgrounds and niches within the note space vary - spanning from hard money to NPL 2nds and NPL 1sts. https://www.meetup.com/Orange-County-Real-Estate-Investors-Association-OCREIA/events/265877992/ I'm a fan of Michael Soliz, as well as Bill Tan who is the moderator. Many Southern CA investors, including myself, have taken Bill's financial calculator class. I recommend that, as well.
- Investor · California, CA · Member since 2016 · 367 posts · 375 votes6y
@Valenda D. Yes, CDF was a typo, meant CFD. I don't think they are all that scary, conceptually it's pretty simple. For me it's just that they are almost always for very low end junk houses in sketchy areas. That makes them too risky for me, I know some people are making money with them.
As far as LLC's go, there is a lot of conflicting information, I don't know what to think anymore. Mine is TX, it's cheap, still have to pay CA $800 no matter what, but the TX side of the cost equation is cheap. I used to have a NV LLC, but they have become quite expensive. My understanding is that CA LLC's offer weak protection, again there is a lot of conflicting information on this.
Join the conversationCreate a free account to reply, vote on answers and follow this thread.