Note Investor Starting out

[Nicholas Candaffio]

Hi Everyone,

I've been doing some research and I think that non-performing 1st position notes are probably the best place for me to start given my situation. I currently have 20k I could borrow from my 401k as well as about 10k cash on the side. I'm getting conflicting advice from different articles and books I've been reading. Some say to wait until you can afford a small portfolio of notes before you start investing, others say doing is the best way to learn so get your feet wet. 

I'm looking for some advice from the group as to whether to hold off and keep saving up, or pull the trigger if a good deal comes along. Thanks in advance!

[Tim S.]

My take, I would not borrow from a 401K to do this, assuming the 401k is with your current employer. If it's a previous employer then, you should roll it over to a Self Directed IRA, and investing in notes that way is a good idea.

If current employer, you would need to repay the loan in full if you chose to leave or are terminated.  You can't roll over a current employer 401K to SDIRA in 95% of cases.  A few will let you do it.   

You'll have to repay that loan out of each paycheck.  That's money that is not tax deferred, you'll have to pay taxes on each loan payment.  Vs. the same amount going right into your 401k (tax deferred) if you didn't take out the loan.  

I'm not a CPA or Financial planner, you should ask an expert. 

[Nicholas Candaffio]

Thanks @Tim S.

You've definitely defined some of the pitfalls of a 401k loan and if my goal was general wealth building, that would be good advice. However, my overall goal is early retirement (at least from W2 income) so I'm looking for assets to provide cash flow now, not in 30 years.

My servicer allows me to make payments after I leave employment and my "cash" number above is less a reserve for the taxes and penalties I would need to pay if I converted the loan to an early withdraw. As for the paycheck deduction not being tax differed, than money would have otherwise been saved as after tax cash anyway.

[Chris Seveney]

Nicholas Candaffio if you have never bought a note before and are not heavily involved in finance or real estate in a day to day basis I would suggest teaming with someone on your first deal.

[Mike Hartzog]

I agree with Chris on this. The reason I say this, other than experience level, is that 30K is a marginal budget for NPN investing. You can certainly buy NPNs for less than that, but it may not be the best first move. New investors are commonly tempted to go for the low value collateral loans (low property value) because they are plentiful and the price is lower. Unfortunately these typically carry far more risk than higher value collateral investments. Combining forces with another investor to use more capital in taking down a higher quality asset is a better approach in my opinion. Remember, these loans are secured by property, and if the property securing your investment is worth 40K fixed up and requires 35K in repairs, you're very unlikely to recover your capital much less make a profit.

[Account Closed]

@Nicholas Candaffio - you mention you are looking for assets to provide cash flow. Out of curiosity why do you think NPNs are the best place to start versus rentals or performing loans? 

[Jeffrey Holst]

I have been increasingly interested in note investing but I think it makes more sense to start with a rental give the relatively small upfront funds you are suggesting starting with. One of the comments correctly points out lower dollar notes tend to be riskier in general and in my opinion should be only attempted if you are completely fine getting the property. A lot of times less scrupless investors sell their properties on notes and keep the notes attached to properties they like and sell off the notes on problem properties. For this reason I feel like low dollar notes are best suited for active property investors who have market specific knowledge related to the property securing the note.

[Nicholas Candaffio]

Thanks everyone,

I will probably continue to save up and search for partnership opportunities. 

I'm curious though as to why people are suggesting rentals. Don't they all the same many of the same low cost property pitfalls, except I'm paying a price much closer to the market value? 

[Account Closed]

I didn't suggest one way or the other, was just curious to understand why you picked NPNs (which may or may not end up cash flowing in the end) over rentals and performing notes (which most likely produce cash flow immediately), since you mentioned you want cash flow

To your question, I think starting with 10-30k in rentals is pretty different from notes. The main reason is rentals have leverage available, so if you are employed then you could get a mortgage for 80-96.5% of the value of the property, meaning your 10- 30k could theoretically buy a house up to $857,000 (not that I would recommend it). Notes on the other hand are an all cash game, so your 10-30k is going to buy a 10- 30k note, which to Chris and Mike's point is probably on the lower end, and it's likely if you are not familiar with the space, will mean that your potential profit margin will be eaten up by the costs associated with NPNs. 

Third, maybe I'm just conservative, but I wouldn't borrow from my 401k for a first deal. Just work harder to save up or find a partnership (or ideally both). I bought my first note because I (i) have a background in lending/finance, (ii) have the cash saved on hand for purchases and reserves and (iii) have built relationships with experienced investors who can help me when I have specific questions. I don't think it (or any asset class) is a space to rush into without planning for what could go wrong.

Good luck!

[Jeffrey Holst]

Also as an aside if you want to do note investing make sure you have listened to show 28 It is packed full of great info on note investing

[Kareena Heath]

I am new to NPN investing also. I have been studying the process since Sept 2017. I work with a partner and we are looking forward to closing our first note by April 2018. there are many moving parts with NPNs, so make sure you know what you are doing, or partner with someone who knows the process.

[Jay Hinrichs]

I have one comment what if you make a boo boo and lose most of our principal that you use to buy the note.. where would that leave you.. if that leaves you in a very bad spot.. then your under-capitalized to go into this.

@Mike Hartzog  Mike has a fund that does the heavy lifting you may want to see if you can do your first deals in the fund with an expert.. plus with the fund they spread the risk if they hit a bummer I am sure its absorbed if get unlucky and hit a bummer out of the gate you take 100% of the risk..

[Wesley Wells]

You could invest in partials

[Kareena Heath]

@Wesley Wells

Do you mean that @Nicholas Candaffio could invest in partials buy buying the performing note and selling off some of the payments at the front of the note?  Or do you mean he could buy payments from someone who has performing notes?

[Wesley Wells]

Buy a performing partial from another investor.

[Odie Ayaga]

Welcome @Nicholas Candaffio. Lot of good info for a new note investor to start off with. I would say if you're set on cash flow, but are not particular as to where it comes from then rentals is an option. Personally I'm interested in cash flow, but not interested in dealing with rentals in my current situation. 

If you do decide you're set on notes JVing with a knowledgeable investor is a good way to get started and get your feet wet. Make sure though that, as @Jay Hinrichs mentioned, you aren't utilizing funds that you wouldn't mind losing if your investment went south. Also, as @Wesley Wells mentioned at your price point partials and CFDs may be a good consideration for you to look into as well. Best of luck!