Realistic timeframe to get to $1,000/month starting with $5,000

11 Replies

Hi guys,

I'm looking into non-local note investing as a means of achieving a 2nd income. $1,000 a month would be great and pay much of my monthly expenses, so that is my first goal.

I listened to Dave's book in the car but haven't had the time to fully process the information. What I've loosely gathered is below, can anyone tell me if these figures are in the ballpark?

-- I start with $5,000 and spend a few weeks looking for note brokers.

-- Invest into a $5k note yielding 15% per year, or about $750 per year, $60 per month.

-- Look for opportunities to recapitalize, either by raising private money (unlikely this early on) or "collateral assignment" loans to borrow at, maybe 7.5% while re-lending at 15%.

-- I keep doing this until I go from $60 a month to $830 a month, which would take 28 investments assuming they were all $5k notes yielding net 7.5%. If I acquire 1 new note every 3 months, it will take 7 years to hit my initial target.

I know this doesn't include notes that turn NPN, I'll have to read more about that. Are the numbers and timeframe roughly in line though?

Thanks

@Gary Clisele, based off of your numbers that is right, but there are a lot of holes in that strategy. 

First off will be finding notes for only $5k. Second will be finding one that yields 15%. That combination typically is for an extremely risky asset. Also, you are much more likely to find private money to recapitalize at this stage than a collateral assignment. Traditional lenders will want to see a proven track record and will want to lend against a much much larger portfolio of notes.

Honestly, the timeframe is highly dependent upon you. If you are only using your own money then it will take a long long time to grow from $60 to $1000. If you are using other peoples money, which you are when you talk about recapitalizing, then it can be done much faster. 

@Gary Clisele Also you will be paying servicing fees every month on every note you own that is boarded with a servicing company. The cheapest is around $25/month significantly cutting into your monthly yield on such a small note.

Gary, I think a $5K note yielding 15% is very unrealistic unless you by a non performer and get it reperforming. At $5K that is probably going to be a 2nd position note or a first position note on either a very low end home in the hood or way out in the middle of pudunk. Neither are very easy to sell should you have to foreclose. 

Originally posted by @Jay Jasunas :

@Gary Clisele Also you will be paying servicing fees every month on every note you own that is boarded with a servicing company. The cheapest is around $25/month significantly cutting into your monthly yield on such a small note.

Thank you for bringing up this point Jay, I did not consider it.

Originally posted by @Bob Malecki:

Gary, I think a $5K note yielding 15% is very unrealistic unless you by a non performer and get it reperforming. At $5K that is probably going to be a 2nd position note or a first position note on either a very low end home in the hood or way out in the middle of pudunk. Neither are very easy to sell should you have to foreclose. 

Good to know Bob. I have been looking into non-performing notes and while higher risk, I believe they may be a better start. Though I'll need more starting capital to get going.

Gary Clisele
Also if your buying a note for $5k the quality of the asset will be very poor and is most likely a property in a D area that needs extensive repairs -

If you end up taking the property back it will probably be a loser since the rehab will be higher than the property is worth

As a note guy, why would you rehab it? If you can get a DIL and the value is there, the BPO checks out, and your at a great enough spread and have $5k into it, I would consider owner financing it to someone like an investor or maybe a land contract if available, with enough down to cover your cost.

Then you have your money back and their payments are gravy. 

I dont know ANY private lenders who use a servicer. So you could start out that way and then maybe not need one.

Or you could short sale it, etc.

Rehab would be the last ditch effort I would ever consider.

Location, condition, etc are all known before you ever buy, so it not like you HAVE to buy it or will get stuck with it.

Do your DD, REAL DD, not this electronic nonsense and youll probably be ok

And on $5k, a 15% return is only $750...

@Cliff Durrett , thanks for the tips! Are you buying notes that you can see in person? If you buy some non-local notes as well, what would you consider proper due diligence in those cases?

I think I will revise my initial target down to $500 a month. A pittance to the experienced guys, I know. For me even that side income would be near life changing.

What do you mean by "buying notes I can see in person"?

Do you mean the underlying asset? If so, then almost never! I have a hands on (NOT electronic) BPO or 2 done. You never get to see the inside of the house or asset securing the debt unless its been abandoned and the bank had to secure it and they took pics. I then always figure the house needs work, and go by the AS IS quick sale value, then offer on the note accordingly.

We unfortunately have real estate guys buying notes now and trying to sell notes based on ARV and other things that just rarely translate in the note world. So basically they dont know what they are doing and hoping for a quick buck.

The DD is the BPO ($125+), title search ($125+, different than a typical search as you need to see the assignments are recorded), file review (to include the original blue inked note and mtg, allonges, assignments, servicing notes, etc.) which is typically done by you or you will need to pay someone about $300 to do it.

Most note investing is numbers, so you need to know what youre doing, planning for, what the owners options are before making an offer, then plan to throw it all out the window if need be and regroup. A borrower might say they are willing to give a DIL, then instead hire a FC atty to fight for years, then go BK, then... plan for the worst and youll be ok.

As others have stated, buying a whole note at $5K will be problematic. You may be able to buy partials though if cost is restrictive for you. Probably difficult to stick to both the $5K AND 15% return though