Other Avenues of Note Investing

Wholesaler · Newark, DE · Member since 2015 · 303 posts · 80 votes

Granted, I'm aware that the main discussion here is note investing on real estate, however, I'm slightly curious to hear some feedback.

Does anyone invest in other types of notes or paper outside of the real estate variety? I studied note investing a few years back and noticed there are other avenues such as annuities and other types of paper that generate a form of cash flow. Would love to hear who invest in notes outside of just real estate notes and any advice they can give for said notes.

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Edward B.
Investor · Midlothian, VA · Member since 2015 · 980 posts · 823 votes
8y
@Dustin Verley, you can invest in any type of debt. I know of people who used to invest in car liens and companies that would buy defaulted CC debt. The premise behind them all is the same, you have to be able to evaluate the risk and demand an appropriate return.
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Dustin Verley
OP
Wholesaler · Newark, DE · Member since 2015 · 303 posts · 80 votes
8y
Edward B. Yes, I’m aware. I even heard of some investing in lottery winnings and/or sports athlete contracts before. I was just curious if anyone here personally invests in other notes rather than just real estate. Thanks for responding. 😁
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Phil G.
Real Estate Broker · MA · Member since 2013 · 361 posts · 297 votes
8y
Not exactly the same, but a similar line. I used to factor companies' receivables.
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Dustin Verley
OP
Wholesaler · Newark, DE · Member since 2015 · 303 posts · 80 votes
8y
@Phil G. We’re you purchasing non-performing notes such as debt purchases from creditors, or actual performing notes such as that of a business to business receivable?
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Phil G.
Real Estate Broker · MA · Member since 2013 · 361 posts · 297 votes
8y
@Dustin Verley
I bought current receivables from manufacturing companies for a discount and was paid by their customers directly in 30, 60, 90 days depending on the terms agreed by the company and the customer. Our discount based on the terms.
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Dustin Verley
OP
Wholesaler · Newark, DE · Member since 2015 · 303 posts · 80 votes
8y
Now that is a very wise investment! How did investing in such receivables work out for you? Were the small and mid-sized manufacturers or larger manufacturers? How did investing in manufacturing receivables differ from investing, let's say, in real estate notes?
You've actually gave me a new perspective on note investing... especially in manufacturing where cash flow seems to be imperative for continuing business.
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Account Closed
Rental Property Investor · Austin, TX · Member since 2013 · 118 posts · 98 votes
8y
@Steve Hodgdon has a business related to non-re debt collections
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Shiloh LundahlPro Member
Rental Property Investor · Gilbert, AZ · Member since 2016 · 3k+ posts · 4k+ votes
8y
@Dustin Verley What about investing in promissory notes. We have had 3 people this month invest with us in promissory notes. These are debt investors whose investments are secured by deeds of trust on properties. It is a little different that then traditional notes, but they are similar in a way.
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Account Closed
Rental Property Investor · Austin, TX · Member since 2013 · 118 posts · 98 votes
8y
@Shiloh Lundahl - out of curiosity, what is the difference if they are both notes secured by a deed of trust/mortgage?
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Shiloh LundahlPro Member
Rental Property Investor · Gilbert, AZ · Member since 2016 · 3k+ posts · 4k+ votes
8y
@Account Closed mortgages are usually created by mortgage brokers (especially due to new limitations set forth in the Dodd Frank act from what I understand) and mortgages are amortized over a certain period of time.
Promissory notes are basically loans that also have certain time frames and are often secured by collateral. They don’t need to be real estate, they can be cars, personal or business property, etc. These loans can be long term or short term. These loans can have principal pay down or interest only or lump sum at the end of the term. It all depends on what is outlined in the promissory note.
A difference is that you don’t own a mortgage to a home. You own a promissory note that happens to be secured by real estate. So in reality they look really similar in this type of situation but you don’t have to follow mortgage lending guidelines to create a promissory note.
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Account Closed
Rental Property Investor · Austin, TX · Member since 2013 · 118 posts · 98 votes
8y
Thanks Shiloh. I think I may be misunderstanding your 1st and 3rd paragraph, or there's a bit of a confusion between mortgage and notes. For real estate loans, they all have two instruments (1) a promissory note which is an IOU and outlines the terms and (2) a mortgage or deed of trust which is a security instrument pledging the property as collateral for your note. Everything I have seen includes both a note and a mortgage/DoT to secure the note.
Maybe I have missed something, but I'm not aware of a loan where you have a note, and "happen to be secured" without also having a mortgage or DoT, otherwise how are you secured? And to your last sentence, I'm not sure there is a workaround to avoid mortgage lending rules, especially if your loan is to a borrower who is also occupying the home (given how sensitive the CFPB is with owner-occupied loans).
Sorry for the segue...
https://www.nolo.com/legal-encyclopedia/whats-the-...
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Account Closed
Rental Property Investor · Austin, TX · Member since 2013 · 118 posts · 98 votes
8y
In summary, I don't think you pick between a Mortgage or Promissory note, and the Promissory note allows you to avoid mortgage lending guidelines.
You have a Promissory note, and then based on the state you secure the note with a Mortgage or a Deed of trust, and no matter what there are guidelines to be mindful of, particularly if its to a owner-occupant.
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Dustin Verley
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Wholesaler · Newark, DE · Member since 2015 · 303 posts · 80 votes
8y
Shiloh: I, too, am slightly confused by your initial posting earlier. Are you saying you've had three private lenders invest with you to purchase property? Not sure if I'm interpreting correctly here.
Abel: My intent for this post was to find if there's anyone out there who invests in other types of notes (or promissory notes to remain technical.) Notes, in general, come in many varieties, as Shiloh pointed out. Not always does it have to be a promissory note secured by a property. For instance, selling a car, collecting on an annuity or lottery winning, or as one person mentioned above, a companies receivables.
Heck, this is what collections companies do when they purchase non-performing notes from creditors at a discounted price.
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Shiloh LundahlPro Member
Rental Property Investor · Gilbert, AZ · Member since 2016 · 3k+ posts · 4k+ votes
8y
@Account Closed This can be confusing because it looks similar to a mortgage in that the collateral is a property and you are getting a loan.
The way it is different is there is a lender who is lending money to my business and there is a promissory note being created to define the loan parameters to my business. In turn I am putting up collateral (a second position deed of trust on a property that my business owns) so that if I don’t pay back the loan then the lender can foreclose and recoup their money. I can then spend that money on whatever I deem appropriate. A mortgage is where a bank pays money directly to a seller and retains title of the property until the buyer pays back the loan.
Because I am not creating a mortgage, I do not have to follow mortgage lending rules. Because I already own the property, or my business owns the property, I am able to get a loan from somebody and put up my own property as collateral for the loan.
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Shiloh LundahlPro Member
Rental Property Investor · Gilbert, AZ · Member since 2016 · 3k+ posts · 4k+ votes
8y
@Dustin Verley No they did not invest with me to buy the property. After I owned the property (or better said, after my business owened the property) and we had it leased out, I had a lot of my own money into the properties so I offered second position notes (promissory notes) performing at 11-12% for 4 years on some of these properties to pull out our some of own money out of the properties. After paying all of the expenses associated with the properties, and the new lender who comes in at second position, there is still enough income for my business partner and I to each cash flow on these properties.
Maybe @Scott Carson or @Dave Van Horn could explain this better than I can.
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Dustin Verley
OP
Wholesaler · Newark, DE · Member since 2015 · 303 posts · 80 votes
8y
Originally posted by @Shiloh Lundahl:
@Dustin Verley No they did not invest with me to buy the property. After I owned the property (or better said, after my business owened the property) and we had it leased out, I had a lot of my own money into the properties so I offered second position notes (promissory notes) performing at 11-12% for 4 years on some of these properties to pull out our some of own money out of the properties. After paying all of the expenses associated with the properties, and the new lender who comes in at second position, there is still enough income for my business partner and I to each cash flow on these properties.
Maybe @Scott Carson or @Dave Van Horn could explain this better than I can.
So you're selling a partial note, or a portion thereof, and not necessarily the entire note. And you're doing so in a second (junior) lien positioning. Is this correct?
The objective to doing so is to leverage the position of the note for a return for the second-position lienholder, and to pull some of your money tied up out of the property... similar to a refinance?
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Shiloh LundahlPro Member
Rental Property Investor · Gilbert, AZ · Member since 2016 · 3k+ posts · 4k+ votes
8y
@Dustin Verley the objective is to get loans for my business. The way that I secure the loan for the lender is that I put a deed of trust on a property that I own that has equity in it (I could theoretically put a DoT on a property that has no equity in it but to help the lender feel more secure, I put the DoT on a property that does have equity in it).
This is not an amortized loan and a promissory note does not need to have anything to secure it. So this is not a partial note or a portion there of. It is a promissory note that is collateralized by a property. All in all it does function very much like an interest only second mortgage on a property. And it looks like I am taking money out of property.
People call this type of investing debt investing. They just make money on their money lent out the same as a private money lender.
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Edward B.
Investor · Midlothian, VA · Member since 2015 · 980 posts · 823 votes
8y
I'm with you @Account Closed, he is creating a a second mortgage/DoT on one of his property and selling the note associated with it. This is the same as any second loan on any property. It sounds like Shiloh does not understand that every "mortgage" has a promissory note that goes along with it. This is a common misconception. He is getting around CFPB by creating the loan on a property owned by a business and not owner occupied.
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Phil G.
Real Estate Broker · MA · Member since 2013 · 361 posts · 297 votes
8y
Personally, I stay far away from seconds and generally advise others first getting into purchasing individual notes to do the same.
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Dustin Verley
OP
Wholesaler · Newark, DE · Member since 2015 · 303 posts · 80 votes
8y
If it works for Shiloh, then all the best. But I've never heard the process that Shiloh is explaining before (to create a second loan and sell the note associated with such.) But to each his own I guess.
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Tracy Z. Rewey
Investor · Orlando, FL · Member since 2013 · 837 posts · 316 votes
8y
@Dustin Verley In addition to real estate notes I've also worked with these cash flows:
- Business Notes - no real estate as collateral just FFE (furniture, fixtures & equipment) and goodwill.
- Mobile Home Only Notes - mobile home on rented lot so no real estate
- Invoices - buying accounts receivable at a discount.
- Cell Tower Leases
- Land Leases
- Casino or Jackpot payouts
- Lottery payments
- Structured Settlements
- Annuities
I haven't personally worked with Auto notes but know several investors doing well in that arena as well.
The basic concept with all of these options is similar (purchase a future cash flow at a discount using time value of money calculations or IRR) but the documentation and due diligence will differ.
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Jay HinrichsBusiness Member
Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
8y
Originally posted by @Account Closed:

Thanks Shiloh. I think I may be misunderstanding your 1st and 3rd paragraph, or there's a bit of a confusion between mortgage and notes. For real estate loans, they all have two instruments (1) a promissory note which is an IOU and outlines the terms and (2) a mortgage or deed of trust which is a security instrument pledging the property as collateral for your note. Everything I have seen includes both a note and a mortgage/DoT to secure the note.
Maybe I have missed something, but I'm not aware of a loan where you have a note, and "happen to be secured" without also having a mortgage or DoT, otherwise how are you secured? And to your last sentence, I'm not sure there is a workaround to avoid mortgage lending rules, especially if your loan is to a borrower who is also occupying the home (given how sensitive the CFPB is with owner-occupied loans).
Sorry for the segue...
https://www.nolo.com/legal-encyclopedia/whats-the-...
Abel the description above by Shiloh makes zero sense as you know.. a mortgage and DT are the same thing just different names basically and a note is either secured or NOT secured... can't be both LOL ugh BP sometimes some really bad info floats around here.
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Jay HinrichsBusiness Member
Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
8y
Originally posted by @Tracy Z. Rewey:
@Dustin Verley In addition to real estate notes I've also worked with these cash flows:

Business Notes - no real estate as collateral just FFE (furniture, fixtures & equipment) and goodwill.
Mobile Home Only Notes - mobile home on rented lot so no real estate
Invoices - buying accounts receivable at a discount.
Cell Tower Leases
Land Leases
Casino or Jackpot payouts
Lottery payments
Structured Settlements
Annuities
I haven't personally worked with Auto notes but know several investors doing well in that arena as well.
The basic concept with all of these options is similar (purchase a future cash flow at a discount using time value of money calculations or IRR) but the documentation and due diligence will differ.
Auto liens are pretty stable investment if you can find them .. of course its with used car dealers usually or its sub prime and really sub prime.. but with the new tech they can put in buyers of sub prime cars.. IE a little thingee that will light up on their dash that says a payment is due and if the payment is not made the car is disabled.. and of course GPS tracking so they can take the car back..
the other risk I have seen personally is you get a bad dealer and he sells the cars pockets the money and never pays you the lein holder or transfer title t the new car owner.. that is right out of FARGO.. but I new a new car dealer back in the 80s that did just this same thing.. he was a new Chrysler dealer..
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Tracy Z. Rewey
Investor · Orlando, FL · Member since 2013 · 837 posts · 316 votes
8y
Originally posted by @Jay Hinrichs:

Auto liens are pretty stable investment if you can find them .. of course its with used car dealers usually or its sub prime and really sub prime.. but with the new tech they can put in buyers of sub prime cars.. IE a little thingee that will light up on their dash that says a payment is due and if the payment is not made the car is disabled.. and of course GPS tracking so they can take the car back..
When I first heard about the starter interrupt device for auto lenders I thought - that sounds like a whole lot easier than foreclosing on real estate! I have to admit I was intrigued. For anyone that wants more details this is a decent overview from NPR news: https://www.npr.org/sections/alltechconsidered/2014/10/16/356693782/your-car-wont-start-did-you-make-the-loan-payment
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Jay HinrichsBusiness Member
Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
8y
@Tracy Z. Rewey I have a client here in PDX that is a big Toyota dealers I think they have 3 stores and they are HUGE sub prime auto note buyers I mean BIG probably one of the largest on the west coast if not the US.. and we where in a meeting on something else when I asked him how the heck to you take this risk
I mean folks can just drive off with the car.. and he explain how it works.
Now in the deep south in Jackson MS when I was down there I would also see these used car dealers with the 100 down 100 a month.. I was at my local water hole the 9 months I spent there.. and saddled up to a nice guy who happened to be a used car dealer I asked him the same question how can you take that risk.
His answer was classic
SON my clientele will live here their entire life they may drive to New Orleans once or twice in their life.. when I sell them the car I always get where their moma lives.. and if they don't pay we just drive around till we find it.. most of my clients will live work and die in a 5 mile area.. LOL that one floored me
I had opportunity over the years to do some yacht loans and I thought no way they sail off to the carib and they are gone.. same with Airplanes.. I have had many airplanes over the years and boy talk about here today and gone tomorrow and in the US you are not legally bound like other countries to file a flight plan so you can just stay out of Class Bravo airpace and no one will ever know where your at.
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Other Avenues of Note Investing

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