C class NPNs in a cheap market, how much to budget?

Question

Hi all,

Working backwards from an initial goal of $300 per month, $3,600 per year, I would need $18,000 in starting capital if my average return is 20% per year from NPNs.

Sounds doable in terms of saving, but my concern is that if I buy 2 or 3 notes, probably NPN junion liens, each one will still be too small (really bad quality or bad collateral in a dangerous area).

I would like to ask you guys what a realistic floor amount would be to budget per note in a cheap, midwestern C class area where homeowner quality is still acceptable for note investment.

I am thinking it would be around $10,000 and I would want another $5,000 in reserve, these are just guesses though. If this is in the ballpark I'll change my thinking on starting with multiple notes even if the starting risk is higher that way.

PS: I'm willing to put in the time on junior liens. My main concern is covering my downside especially on the initial batch, so that I can get rolling.

Dan Deppen · Answer

I would definitely seek some training before diving into NPN seconds, or diving into notes in general for that matter.

Natasha Hunter · Answer

I would suggest purchasing 1 1st lien performing note to see how the process is done and further educating yourself. Seconds are an entirely different ballgame and you could cause yourself some hardship if you go in it blindly. With a performer, you will still see cash flow and you can start educating yourself during the process. There is a lot to learn in this space especially if you are planning on purchasing a note in a different state with different laws. Invest in some reading material like, Invest in Debt and Bulletproof Due Diligence. Start religiously watching videos from people who are active in the space and get on some of the social media sites where note buyers and sellers are prevalent. These people will be your lifeline throughout your first few notes. After you feel better informed about what you're doing in the performing note space, you should look at Non performers and seconds.

Andy Mirza · Answer

@Odie Ayaga I agree with your point about specialization. Not all NPN's are the same and investors in 1st's and 2nd's use different strategies. Then, there are different strategies among 1st position NPN's as well. Our strategy focuses more on liquidation whereas other strategies focus on getting the notes to re-perform and require a lot more borrower outreach. In the beginning, though, it will take a while to develop a niche.

Jay Hinrichs · Answer

well I try to be a little gentler.. for beginners they are certainly highly risky.

Its OK to begin in this if you have 250 to 500k liquid  buy 100k worth then go to work and see what you can do.

to do this with minimal capital then yes I think its Russian Roulette.

Chad U. · Answer

Lol, always love your candidness Wayne.

Jay Hinrichs · Answer

OK to add.. 5k reserves in the NPN space is not going to cut it.. you make a mistake on your first one your toast. you will lose all your money.

if and and really its when you have to forclose that number alone is 2k or so in cost.. you are in second postion so some amount of money is going to be needed to pay off the first or bring them current.. and if its come to that the house to be repositioned probably needs some pretty extensive repairs..

so you need to back into what this stuff would sell to a local wholesaler and by the time you corral the asset if its true mid west C class which probably is now D class your talking a 5 to 15k TOTAL value asset.. I know i fund 300 or so of these a year i see the HUDS>

if the dollars your talking about are your total cash to invest and reserves then your woefully undercapitalized to be in this.. you would be better off doing Prosper loans or finding some good crowdfunder that take small denomoinations.

Gene Chandler · Answer

Wait... What?  Are you starting out with C class notes? The key words being "Starting Out" I can only assume you have connections for work-outs and DD.

Best Regards... GC

Odie Ayaga · Answer

Not sure if you've posted elsewhere on the site @Gary Clisele suggesting you're brand new to notes or haven't invested in any education as some of the posts above would imply, but taking your post at face value in a vacuum your numbers don't seem that far off in my opinion. 5K reserves per note is a reasonable starting amount to cover potential foreclosure, servicing fees, lawyer fees, all the little fees that add up even if you don't have to foreclose.

I'm a big believer that if your goal is to invest in 2nd lien NPNs that you should invest in 2nd lien NPNs. While I get the theory behind buying 1st lien performing as training wheels I don't really buy the concept and think there's even a possibility to gain a false sense of security that you're better prepared for NPNs than you may actually be. Not to mention I've heard of multiple investors who have purchased a performing note that immediately went non-performing thus resulting in them buying a non-performing note at a premium. To that end though, be very cognizant of what you're getting yourself into and you should be able and willing to lose all of your investment should things go wrong.

Andy Mirza · Answer

@Gary Clisele I don't know if there's a limit to the downside risk for you in seconds assuming that you might have to make payments on the 1st if you foreclose.

Budget $2k-$5k to foreclose depending on the state you are foreclosing in. Then budget the amount for mortgage payments you need to make on the first to keep it current while you're holding it the property.

Are you self servicing? If not, budget $30/month if you want bare-bones, compliance only or $95/month for full service.

I don't specialize in seconds but the biggest risk I see is having to make that mortgage payment on the 1st. What if you foreclose and you can't sell the property? Then, you're stuck paying on the 1st or risk losing the property when the 1st forecloses on you....

C class NPNs in a cheap market, how much to budget?

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