Property or Paper - Which is the best return for you?

9 Replies

12% - 18% returns are available to me constantly through performing mortgage notes and cash-flow rental property.  I like holding notes at 12%, but I don't like just consistency without an larger upside.  I enjoy rental properties at around an 18% return, but I don't love the maintenance or management expenses.  I do however like the thought of each property appreciating and potentially doubling my return.

Do you do both property and paper like me?  Which do you like more?

Hi Darren, like you we own both cash flowing rentals, cash flowing re-performing notes, and cash-flowing performers. We are seeing between 10-18% as well. We have property management to deal with the tenants and maintenance, but it does eat into the profits slightly. On the other hand, it certainly eliminates a lot of headaches. But I tend to prefer non-performing notes over buy and hold rentals for the following reasons:

1) We typically are able to get nearly 20% of the non-performing borrowers to re-perform on their loan at the existing terms. This is usually because their finances have improved. If that happens, it is fairly quickly (usually 3 months) so the returns are greater than 20% when annualized.

2) We get another 30% of the non-performing borrowers to re-perform at "new" terms through a trial loan mod or forbearance. We use our licensed attorneys and servicer to handle the transaction so that we remain compliant with regulatory issues. We collect payments and season the re-performing loan for 9-12 months and then sell it. These generally earn greater than 20% returns annualized

3) If we have to foreclose, then we do minor rehab work and attempt to sell it for cash. If it doesn't sell within 30 days, then we offer it as a land contract for a fair price. We then sell that loan after 9 months of seasoning. The yields on that are generally around 12-15%

4) If all of the above fails, then we rent the property and after 3 months sell it as a turnkey rental property. We create a note for the investor and the cashflow pays their note. Usually 12-18% too.

Of course as always, it "depends," and past performance is no guarantee of the future. And this does not constitute legal advice.  :)

@Wayne Snell

Thanks for your comments Wayne.  Most of my clients are on the "passive" side of the "Active-Passive" spectrum of investing and non-performing notes are definitely on the "Active" side, so I'm typically not playing the same game as you are with those non-performers, but I do like the numbers on them.  

If I'm working on a non-performing note, it's usually because a performing note went bad and I took the property.  It's more a more "active" investment then, but taking the property back allows my returns to go up considerably too.

Thanks for your comments.

Good point Darren. In fact, I neglected to mention that while my company is an "Active" non-performing notes investor primary focused on growing our own portfolio. We do work with some JV participants who are typically "passive" as well. Some are looking to get a little bit more hands-on, but most are just sitting back waiting for that check :)

Darren I look for bigger hits.... if I am going to own the asset.. so value add is what I look for or ground up construction that gives me a COC return of 100% or better per year ..

then paper for that nice consistent cash flow I have not one bit of interest in non performing been there done that a lifetime ago.. too much drama.. LOL... I guess if I went into non performing as long as I never had to deal with the day to day and just funded it that may be one thing.. but dealing with defaulted borrowers is the last thing at my age that I want to do.. I like good performing responsible borrowers that pay like clock work  LOL.

Paper! My paper investments on the NPN side lead to reperforming notes, REO's and rentals. While I avoid heavy rehabs in most areas, I do have some going in the Texas and Florida markets.

We have found that with lower priced assets we can get the same cash flow as a rental with less drama.

@Bob E.

That is definitely the truth about the drama.  There is almost never any drama with performing notes and there is usually some drama on each property I hold at one time or another.  Thanks for your comment

@Darren Eady  The one other thing about rentals is the cost of turnover.  Lost rent, rehab, leasing fees, etc.  A lot of this is mitigated when you sell with financing.  True your buyer may flake on you but that is a lot more rare and likely to be at a much greater interval then with rentals.