Your Motivation To Start Investing In Mortgage Notes:

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Your Motivation To Start Investing In Mortgage Notes:

Bill McCafferty

Real Estate Investor · Coatesville, PA 19320 · Member since 2011 · 108 posts · 178 votes

Question of the day;
What was your biggest motivation to start Investing in Mortgage Notes?

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Don KonipolBusiness Member

Investor · The Woodlands TX / Avon, CT · Member since 2009 · 6k+ posts · 10k+ votes

@Bill McCafferty

I found I could achieve my target ROI with a lot less risk and a lot less work and time investing in notes rather than investing in real estate.

I also found that notes secured by commercial property to have less competition on the buy side, thus available at higher yields. Added advantage is that commercial property notes are available in larger principal balances, are not tied to borrowers salary or income, are not subject to Federal regulation via the Dodd Frank Act or CFPB, nor are they subject to state laws regarding homestead or personal residences.

In 1999 I started investing in notes personally. In 2002 I started funding originations in addition to buying notes. In 2002 I started a commercial hard money investment fund and ultimately funded 400 plus commercial mortgage loans. The fund was terminated and liquidated in 2012. In 2013 I started a fund that (1) invests in hard money commercial loans I originate (2) invests in performing commercial mortgage loans we purchase from both individuals who owner financed a commercial property and banks wanting to remove a note from their portfolio, and (3) invests in commercial mortgage notes in default from banks where we are able to restructure the note so the borrower can avoid foreclosure, often providing him with the time necessary to sell the property.

My preference is to buy notes at a discount, as this is more profitable than originating private or hard money loans. However, since not enough are available meeting our criteria, we do continue to originate hard money loans.

On a personal level I also invest in real estate equity deals. Although my returns are lower than with my note investments, equity investments provide an inflation hedge, or inflation insurance should we have a return to the high inflation of the late 1970s and early 1980s. My strategy is to have my real estate portfolio leveraged 50% and value equal to twice my note portfolio. So if I have say two million dollars in notes, I also have two million invested in real estate at 50% leverage so the real estate is valued at four million. The result is that the entire four million invested is “inflation insured” by the four million in real estate.

I am able to obtain about a 16% annual yield on my note investments and about a 8% return on the real property investments. This does not include any capital gains appreciation on the equity side.

Private Mortgage Financing Partners, LLC

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Tim Fitzgerald
Specialist · Chicago, IL · Member since 2015 · 75 posts · 43 votes
7y
Being a note investor, I think, gives me additional advantages in real property investing that I would not otherwise have developed, i.e. creative financing techniques and approaches, more innovative marketing approaches (note appraising, to name one but there are quite a few others), extensive experience with negotiating and finding workable solutions for sellers and getting more offers accepted, etc have really increased my ability to find and negotiate very favorable hard real estate deals.
In short, note investing has helped me immensely in my real estate acquisition efforts (I did things in "reverse" order-- notes first which paved the way into my real estate.)
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Phil Hylan
Investor · Mountain View, AR · Member since 2017 · 9 posts · 1 vote
7y
My motivation in becoming involved with the note business is that I needed to find a new career. Upon learning about notes from dozens of youtube videos, and always having had an interest in real estate, it was not a difficult decision to make.
I am in the very beginnings of this, and starting out with a budget of tens of dollars, but I am confident that learning new knowledge and how to implement it is the way forward for me. I have found that the way the note professionals are so free with their tips and resources and eager to explain concepts is refreshing.
Phil Hylan
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Logan Hassinger
Specialist · Fort Worth, TX · Member since 2014 · 528 posts · 226 votes
7y
@Phil Hylan
I’d be glad to help you out with any questions you might have.
Shoot me a message and we can take it from there.
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William "W.J" Mencarow
Investor · Kerrville, TX · Member since 2015 · 53 posts · 72 votes
7y
What got me started in notes? My tenants! When I realized that when there's a problem in a rental the tenants never call the mortgage holder, that did it for me. Since then I've learned how to manage tenants so landlording is easy, and real estate has been a great investment, but you can't beat notes for cash flow.
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Richard Allen
Specialist · Orlando, FL · Member since 2015 · 117 posts · 89 votes
7y
My motivations have changed significantly since 2012 when we started buying notes. Initially, we started purchasing notes because it was a cheaper way to buy houses with less competition. During that time, Blackstone and the other big reo buyers were paying 100 to 110% of value for assets at the auction, we used notes to get out in front of those buyers. Our goal, take the house back or sell it at auction, never giving the borrower a chance to catch up on the loan or modify.
Fast forward to today, we try at all costs to keep the borrower in the property and get them paying again. Our motivation now is to manage with a double bottom line, investing for economic returns as well as positive social impact.
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Tracy Z. Rewey
Investor · Orlando, FL · Member since 2013 · 837 posts · 317 votes
7y
My motivation initially was to have freedom of time so I could set my own schedule and be available for my daughter after school. It ended up turning into so much more (in a good way)!
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James Yoo
Rental Property Investor · Los Angeles, CA · Member since 2018 · 29 posts · 32 votes
7y
Very interesting to hear everyone talk so positively regarding notes.
We're heavily invested in RE here in Southern California but it's so over-invested that it's hard to make a buck lately. Even with the market cooldown I'm seeing people are still overpaying for investment property, with small margins and even smaller risk mitigation.
It sounds like many of you started off with/ rental properties and then transitioned to notes.
What is a good starting point for someone interested in diversifying into notes? What do you wish you knew about note investing when you were first starting out? Any and all tips are greatly appreciated.
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Chris SeveneyBusiness Member
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Investor · VA · Member since 2015 · 21k+ posts · 19k+ votes
7y
Working full time with a family doing fix and flips or buy and holds is not scalable. It is 10 PM here on east coast and I am on BP but also reviewing collateral and a tape of assets. I could not be visiting properties at 10 PM to review putting offers in but with notes I can put offers in at 2 AM. You can do notes anywhere anytime. It allows those who have other gigs more flexibility.
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Vadim Levsky
Member since 2019 · 1 post · 0 votes
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Originally posted by @William "W.J" Mencarow:
What got me started in notes? My tenants! When I realized that when there's a problem in a rental the tenants never call the mortgage holder, that did it for me. Since then I've learned how to manage tenants so landlording is easy, and real estate has been a great investment, but you can't beat notes for cash flow.
Hilarious! :) But so true. Tenants can either drive you to drink or
to notes, preferably both! I'm new on this board, and maybe you've
answered this elsewhere (let me know where), but I'd be
interested in knowing more about how you learned to make landlording
"easy." Are there books, classes, etc.? Will you be covering that at
your papersource convention coming up? That seems to be all
about notes, but since a lot of note investors also own real estate, I
think a class on landlording would be great!
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Eva Lowther
Real Estate Investor · Orange, NJ · Member since 2014 · 12 posts · 3 votes
7y
Where to learn about note investing is it here at Bigger pockets? Please advise.
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William "W.J" Mencarow
Investor · Kerrville, TX · Member since 2015 · 53 posts · 72 votes
7y
Vadim, I learned a lot from a book called "Landlording" by Leigh Robinson. I've also learned a lot from John Schaub. In 35 years of owning rental real estate my tenants have taught me a great deal, mostly what not to do. Maybe I'll write it all down one of these days. Eva, you can learn a lot about notes here at BiggerPockets. Beyond that, modesty forbids me from answering your question. So do the rules of this board :) I'll let others answer.
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Scott Carson
Note Investor · Austin, TX · Member since 2012 · 602 posts · 357 votes
7y
If you are looking for a great event to learn about notes, along with networking, @William "W.J" Mencarow puts on one heck of an event in Las Vegas each year in April called the Paper Source Note Symposium! Great event & great networking! https://papersourceseminars.com/
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