3 Reasons that most Note Investors fail

29 Replies

3 reasons that most note investor's fail:

1) Fear that leads to half steppin’. I’m not a fan of rap music but I do like this song from Big Daddy Kane which is titled, “Ain’t No Half Steppin’”. What prevents most note investors from going the extra mile is fear. The note space is very complex and holds a lot of pitfalls. People understand how the numbers work but there is an air of mystery regarding how to obtain the cashflow. What I see over and over is someone will fish around the internet, read a few books, attend a few seminars, and perhaps buy a few notes without proper due diligence which tends to lead to negative results. I never see these folks beyond a 6 month point.

I also find folks that get some formal training but don’t go the full distance with that trainer. They hop around to other people trying to fill voids with their knowledge deficiencies. This too I see on a weekly basis.
2) Lack of capital. I’ve bootstrapped most of my business life. Even when I obtained some success, I still lived with a survivalist mentality…so I get it. What I see happen often is these folks look to broker deals or set themselves up as an expert so they can take down some passive dollars from someone. What happens is they spend more time gaining expertise in branding then in learning how to note invest (i.e. proper due diligence and workout skills). Hence, the disaster train leaves the station.
3) JV partners. I've seen horror stories on both the passive side and the expert investor side. Passive folks find ‘so called' experts only to find that the experts aren't communicating well and don't know what they are doing. I've know plenty of expert investors that get passive investors and don't set up the relationship expectations well from the beginning. This leads to passive investors constantly nagging the expert to the point of exhaustion. This is assuming that the expert has been communicating well to this point, of course.

My heart goes out to people in each stage because they are all people that want more for themselves and their families. The best message I can relay is to education yourself, first and foremost. Then, map out your systems carefully. This will help you gain confidence to move to the next step whether that is picking up a few notes or connecting with some partners (that you set up strong expectations up front).

Good good points Martin. I've always found that taking action overcomes fear, and fear can paralyze you if you don't take action! Here are six steps that I practice everyday in my business and personal life:

  1. Be vulnerable. 
  2. Acknowledge my fears.
  3. Expose myself to what I fear. 
  4. Think positive and push negativity out of my process. 
  5. Manage stress with exercise and meditation. 
  6. Take action and practice courageous acts.

Many new folks I talk to don't really have a strong reason to invest in this niche. Typically they're frustrated with traditional investments and are looking for something with outsized returns. Or they're trying to make themselves a new job.

I ask questions that really are none of my business. 

What's your experience? Do you have a super power that gives you an advantage? Mine is 37 years in credit and collections. 15 years buying unsecured paper.

Why do you believe in this model?

What is your desired result? Usually just an outsized yield. 

Are you an accredited investor? Most want to buy one more and see how it goes. What if it goes to zero?

I'm going to use OPM. How are you qualified to be a fiduciary?

By then, people are done with  me and calling back the gurus who promise them riches in exchange for joining a $25k mastermind. 

This is a get rich slow business. I'm happy with my overall portfolio. A couple of NPN losers chased me back to performing and creating my own seller finance paper.

Fear is not always bad. If it leads to asking intelligent questions to make sure investment is right or not for the person, then I would say it's actually good.

Note investing is good for some investors, but isn't for everyone. Not every investor is qualified (or has the time or inclination) to take over a property if the note defaults, and they have to foreclose, fix it up, resell the property etc.. If that's the case for a person, they shouldn't be investing in notes directly. If they're looking for exposure to the asset class, been a professionally managed fund is a better choice.

Second, while I have a significant part of my real estate portfolio in notes, I also acknowledge that notes don't have the same tax advantages as certain equity investments. In my opinion, it's important to have a balanced portfolio.

There aren't as many spokesmen for notes that do a good job of explaining the benefits compared to stocks or real estate

".......explaining the benefits compared to stocks or real estate"

First, I have to say I am a fan of notes, I actively invest in NPN's. One pet peeve I have, I often see people tout note investing as an alternative to savings which is close to zero return (a fair claim), and the (poor performing, volatile, unpredictable, insert other term) stock market.  

They usually make some claim about how their 401k, or IRA is probably earning close to zero.  I don't know who these people are who are earning close to zero in the stock market.  in 2017 anyone with a pulse should have made at least 10-15%,  Wasn't too terribly hard to make 20% last year and 2016.  2018 is another story.  So my point is, the people who are "advertising" notes as an investment vehicle should be honest about their relative and potential performance.  

It should be considered a red flag if someone is touting 30-60% (or more) as the normal or expected returns for note investing, while at the same time citing near zero returns for the stock market or other competing investments.  Those returns, and better, are certainly possible with notes, I've done it myself.  

It is fair to say notes are protected by the value of the real estate and therefore have a backstop, while stock can go to zero.  That is true in theory, stocks can go to zero.  But do you think Apple, or Exxon, or Amazon are going out of business anytime in the foreseeable future?  So unless you are investing in some really risky stocks, they are for the most part not going to zero or anywhere near it.  

The point being, be wary of anyone who says, "you should invest in NPN's because they are safer than the stock market", that is not true in all/most cases. A particular note deal may indeed be safer than a particular high risk stock, sure.

@Tim Simmons to me personally NPN is a very advanced strategy and is a business that needs to be done by those in the business... average investor who has not a lot of real estate experience and no note experience I don't get their desire to jump into a very complicated transaction.

I get that is soup d jour now and its flooding the market ergo those in it are competing against beginners running up prices.

and of course the HOW TO folks that sell programs and making there way into it much bigger than in the past.. kind of taking over for the wholesaler programs.. 

Me personally I think if someone wants to do NPN they are better off aligning with a very experience company that has been doing it for years.. has done MILLIONS in business..

First thank you @Martin Saenz for starting this thread (and we must be the same age as I certainly remember Big Daddy Kane).

Seems as if everyone that’s posted is experienced in this. So I’ll chime in as one of the new people flooding into the field.

I actually get quite a bit of private messages from people that prefer to just read on here and are new and are in the same shoes as I am and I get a lot of positive feedback for expressing my experience up to date. Thank you to everyone who has reached out.

I would also state up front that my experiences so far are MY experiences. We all come from different backgrounds so what’s good or bad for one may be the opposite for another. Actually I got a message yesterday from someone new to the game who flat out stated this is a job, but he’s home and at least he’s working towards his own vision not someone else’s. I’ve always been self employed for the most part and am not looking for a job.

Ok so I’m one of the people that jumped in with virtually no knowledge or background such as some of the people have on here. I do have a small portfolio of car notes and I just pay a company to monitor the insurance and such and if any problems they just repo the car and put it back on the lot. I just now picked up my monthly check of $6300 or so. Easy as can be, no work involved. That is truly passive.

So I listened to some podcasts saw a few videos and then paid one of the “gurus” (and I don’t like to use that word as it has a negative connotation and the person I paid certainly knows this business.)

But I had no business doing that and worse I brought in a partner who hadn’t even watched any of the videos (the seminar allowed me to bring someone). He is no longer my partner (though the one person I would call my friend) as this was way more work than we anticipated and he works full time so he couldn’t commit.

It is ironic, I received a call the other day from someone that use to work for me with my previous company I owned. He mentioned how he was always amazed how I would just jump into things and say “we’ll figure it out”. To him it was an admirable thing whereas to me it has done good by me and also bad, yet I am who I am.

So here I am. I do believe almost everything that @Jay Hinrichs writes on this. This seems to be the new de jour “get rich” idea.

Please note that I am not badmouthing the business nor anyone in it. But this is definitely work, and I’m not afraid to work, but some jobs are better suited for certain people. My wife would be amazing at this business but she likes her day job and quite frankly she’s relatively well paid and good at what she does. It also has a very high barrier to entry.

I do notice that people are very pleasant and helpful. I met and sat for lunch with @Bob Malecki at IMN and he was a complete gentleman. And if you have a question, people are very helpful especially here.

So as @steve Hidgdon says this is no get rich quick thing it is a long term play (and the person I paid did say that as well).

Have I failed yet? No I’m still here and I’ve built up a good team of people very qualified in this business who will be working with me. But I have at least some capital to start with. I’ve met many that have none. The last thing you want to do is learn on someone else’s dime unless they know up front as I know a nice couple with a lot of money and they jv’ed with someone who is new. The person who is new was very upfront about his lack of experience and questioned them if they were sure they wanted to JV with him.

So as long as you are completely honest well people are grown adults and make their own decisions. So it can be started with no money though I personally couldn’t do that.

I was told by someone who’s been in this for a while and even has a book published on Notes (we live close and we had lunch together) to not go to any expensive course and to just watch all the free content out there and just learn for a couple of years until things turn around (as we all know we are all chasing the same paper). I didn’t listen. Does that mean everyone should do that? No I’m just giving my perspective. I don’t want to sit on the phone and cold call all day. That’s me. Others may not mind and are just happy to not be working for someone. Others are working full time and still make it work.

There is no one easy answer as we are all different people. But for what it’s worth, do know it is a business. One weekend course is not going to cover everything. That’s not a negative against the course I took as I’m not here to badmouth anybody at all.

Well, actually I should qualify what I said in the last paragraph. I recall during the housing bubble I took a weekend course on being a loan processor. I recall sitting quietly there and listening to two women talking in front of me. I believe they were going on to be actual mortgage brokers. I recall one saying “it’s amazing, one weekend course and you can make more than a Doctor”. However everyone is a genius in a bull market. We are not in one now as far as distressed notes go.

I thought I did the right thing by starting out with a performing note but turns out it wasn’t performing. Lack of proper due diligence and knowledge cost me on that (though a good payment was finally just sent in). However once you are experienced I’ve heard of others who bought a non performing that turns out to be performing.

In the end I would just highlight from someone that is new that this a business and to take it as such. Yes no toilets and tenants but every business has its drawbacks as well as it’s positives. Educate yourself and be realistic with what you bring to the table as Steve Hodgdon pointed out.

Best of luck to all!

Originally posted by @Bob Malecki :

Good good points Martin. I've always found that taking action overcomes fear, and fear can paralyze you if you don't take action! Here are six steps that I practice everyday in my business and personal life:

  1. Be vulnerable. 
  2. Acknowledge my fears.
  3. Expose myself to what I fear. 
  4. Think positive and push negativity out of my process. 
  5. Manage stress with exercise and meditation. 
  6. Take action and practice courageous acts.

 Well put, Bob.  These are great words of wisdom.  I like your first one in particular.  I like feeling like I need to be careful as I move throw deals but balance it with action.  Very well put as always.

Originally posted by @Steve Hodgdon :

Many new folks I talk to don't really have a strong reason to invest in this niche. Typically they're frustrated with traditional investments and are looking for something with outsized returns. Or they're trying to make themselves a new job.

I ask questions that really are none of my business. 

What's your experience? Do you have a super power that gives you an advantage? Mine is 37 years in credit and collections. 15 years buying unsecured paper.

Why do you believe in this model?

What is your desired result? Usually just an outsized yield. 

Are you an accredited investor? Most want to buy one more and see how it goes. What if it goes to zero?

I'm going to use OPM. How are you qualified to be a fiduciary?

By then, people are done with  me and calling back the gurus who promise them riches in exchange for joining a $25k mastermind. 

This is a get rich slow business. I'm happy with my overall portfolio. A couple of NPN losers chased me back to performing and creating my own seller finance paper.

 Thanks for the feedback, Steve.  Much appreciated.  I like your points in terms of objectives, goals, past experience, financial situation, and expectations.  I meet folks all the time with little capital and who wish to buy a few notes.  This industry is not set up for those folks to be successful and often times they end up going away OR becoming branding professionals.  I'm not saying, it can't be done, but it's a touch nut for those folks in particular. 

Originally posted by @Ian Ippolito :

Fear is not always bad. If it leads to asking intelligent questions to make sure investment is right or not for the person, then I would say it's actually good.

Note investing is good for some investors, but isn't for everyone. Not every investor is qualified (or has the time or inclination) to take over a property if the note defaults, and they have to foreclose, fix it up, resell the property etc.. If that's the case for a person, they shouldn't be investing in notes directly. If they're looking for exposure to the asset class, been a professionally managed fund is a better choice.

Second, while I have a significant part of my real estate portfolio in notes, I also acknowledge that notes don't have the same tax advantages as certain equity investments. In my opinion, it's important to have a balanced portfolio.

 Ian, I like your underlining theme that one should harness their fear while creating a balanced portfolio for themselves.  I'm a landlord over commercial & residential properties AND I have a portfolio of notes (I self manage all of it myself). I'm a super fan of balance and feel it helps me think on a larger level while I'm working to acquire a new asset.  

Originally posted by @Pete T. :

There aren't as many spokesmen for notes that do a good job of explaining the benefits compared to stocks or real estate

 Agreed, Pete.  The industry has a long way to go from a branding perspective.  

@Robert B., Thank you for sharing your story.  It takes guts to lay out the path you've taken with notes and business.  Much appreciated.  

@Martin Saenz although your head line 3 reasons why MOST note investors fail.. not really sure about that. maybe in the NPN space.. but in the performing space if the investor is lined up with a very experienced company.. failure rate these days is less than 5% but there still is failures..

No note is 100% safe..

our experinces is a little over 1500 performing notes done in the last 5 years and about 10 failures.

its simply a different business.. and the investor that goes for great performing frankly usually has NO interest in non performing because they want consistent worry free income. Not buy into a deal that is already gone sour and you have to work it through.. so you do earn the little extra in return for all that work that's for sure.. the issue comes when as your thread head line stated why do MOST fail.. well when they fail at notes that means they lost principal.. I don't think most do but I can bet a large number of beginners who buy NPN probably wish at the end of the day they did something different.

Originally posted by @Jay Hinrichs :

@Martin Saenz although your head line 3 reasons why MOST note investors fail.. not really sure about that. maybe in the NPN space.. but in the performing space if the investor is lined up with a very experienced company.. failure rate these days is less than 5% but there still is failures..

No note is 100% safe..

our experinces is a little over 1500 performing notes done in the last 5 years and about 10 failures.

its simply a different business.. and the investor that goes for great performing frankly usually has NO interest in non performing because they want consistent worry free income. Not buy into a deal that is already gone sour and you have to work it through.. so you do earn the little extra in return for all that work that's for sure.. the issue comes when as your thread head line stated why do MOST fail.. well when they fail at notes that means they lost principal.. I don't think most do but I can bet a large number of beginners who buy NPN probably wish at the end of the day they did something different.

Correct...this was from the perspective of NPN's. I buy re-performers and performers so I'm definitely with you. Since my background is NPN's, I actually vet the performers as if they were NPN's as a safety measure since I have all the systems in place. Yes, people that buy performing (typically hard money folks), don't care for the dark side. With that said, deal flow is harder to obtain in the performing space as there is so much capital vying for it.

@Martin Saenz we don't and have not had an issue with deal flow.. but like those in the NPN for a few decades they probably have their sources. just like we have ours since we have been doing it for eons.

but generally I agree.. the HM space can be invested in with crowdfunders.. although you have the accredited investor rules on many

but if investors shop for local HML you can usually get a swing at a new performer..

one thing is certain though.. these markets cycle.. always have always will. 

Great comments. I see many people fail also because:

1. They do not treat it like a business. Some treat it like a hobby, but others also have never ran a business. Running a business is not a simple thing to do. Most businesses also do not go belly up because of profit, they go belly up because of cash flow. 

2. They set their expectations very high. If you asked every note investor in their first year how much the made, it would be the equivalent to talking to a fisherman on how big that tuna was he caught. The reality is like any business, it takes time to grow, develop and earn income.

3. People underestimate the time commitment and then when they realize it, they get out of it. As noted above, note investing was a soup de jour last year until bitcoin came around. I saw a lot of people who were "note investors" posting a lot about notes all of a sudden start posting about bitcoin. 

Originally posted by @Chris Seveney :

Great comments. I see many people fail also because:

1. They do not treat it like a business. Some treat it like a hobby, but others also have never ran a business. Running a business is not a simple thing to do. Most businesses also do not go belly up because of profit, they go belly up because of cash flow. 

2. They set their expectations very high. If you asked every note investor in their first year how much the made, it would be the equivalent to talking to a fisherman on how big that tuna was he caught. The reality is like any business, it takes time to grow, develop and earn income.

3. People underestimate the time commitment and then when they realize it, they get out of it. As noted above, note investing was a soup de jour last year until bitcoin came around. I saw a lot of people who were "note investors" posting a lot about notes all of a sudden start posting about bitcoin. 

 Hey Chris, good to hear from you.  Missed connecting at the DME but I barely made it with a cold I had.  I totally agree with points 1 and 3.  It takes a massive commitment to make it work.  For point 2, it depends on the person.  I came out of the gate buying big and self-funding and know others who did the same.  Depends on the person.  Thanks for the feedback.  Martin

Hi @Chris Seveney well, I'm involved with new partners to start another private equity fund for NPLs and another partner for an index fund for cryptocurrencies. Who says you can't do both!  ;^)

@Bob Malecki - I of course agree you can do both, I was more referring to individuals who give a token effort into notes then quickly change “careers” and FOMO and chasing the next hot thing.

You and Martin have been doing this a lot longer than I have. my question which you would be better to answer is what percentage of people have you met at conferences or have been trained by some of the well known investors actually stick with it ?  I believe that number is very very low. Not because of the training but because of many of the points included above.

I'm sure people fail for a lot of reasons but the thing that makes me cringe are the people who with very minimal training (a single seminar) that suddenly start trying to raise money from investors to fund their first deal.  People that 72 hours ago didn't know the first thing about NPNs suddenly soliciting investment capital.  

Not to say that it can't be done. I'm sure there are success stories from people that went to a seminar and JV'd their first investment. But as someone who has worked in the financial services industry and understands what fiduciary responsibility actually means, it makes the hair on the back of my neck stand up.

Well well everyone has to start somewhere. Those a strong moral compass, high integrity and willingness to strive for a win / win outcome are the ones who usually stay in the game. 

Originally posted by @Martin Saenz :

3 reasons that most note investor's fail:

1) Fear that leads to half steppin’. 

Great post and thread.  The fear reason reminded me of something I recently read:

"Time to Fear is like Oxygen to Fire.  It is essential to move past fear with speed and confidence or it can become overpowering."

In note investing the confidence comes through knowledge and experience.  While we can't foresee every potential problem we need to have the belief and skill set to find a solution to every problem.  

Originally posted by @Bill R. :

I'm sure people fail for a lot of reasons but the thing that makes me cringe are the people who with very minimal training (a single seminar) that suddenly start trying to raise money from investors to fund their first deal.  People that 72 hours ago didn't know the first thing about NPNs suddenly soliciting investment capital.  

Not to say that it can't be done. I'm sure there are success stories from people that went to a seminar and JV'd their first investment. But as someone who has worked in the financial services industry and understands what fiduciary responsibility actually means, it makes the hair on the back of my neck stand up.

 This^^^

I'm amazed at some people who are looking for funding partners in one message or post, then in the next message, they are asking such basic novice questions it's obvious they really don't know what they are doing.  How do you have the nerve to ask to be entrusted with someone else's money?   

This is a great thread. Thank you @Martin Saenz for starting it, and @Robert B. your long post sharing your experience starting out with NPNs was valuable especially to me. 

I'm a bit behind Robert. I've read a lot of the books (including yours @Martin Saenz, which was excellent), listened to many podcasts, joined calls, attended local meetings on the topic of notes and real estate investing in general, and recently signed up for an online program. As they say, I know enough to be dangerous. But I'm ready to dive in. If all goes well, I'll own my first note shortly.

For me the ability to navigate NPNs exposes (or will expose) me to lots of nitty gritty and give me a platform to think my way out of what I expect to be some interesting situations. Not that I'm wanting them all to be interesting. I'd said in a post once before, NPN investors are the Houdinis of real estate investing. I don't think it's for the faint of heart, the light of capital, or the naive. I would like real estate investing to become my primary revenue source, and my path of entry for deals to focus on notes - including non-performing.

Happy Investing...

Best,

Marco Bario

Join the Largest Real Estate Investing Community

Basic membership is free, forever.

By signing up, you indicate that you agree to the BiggerPockets Terms & Conditions.