Why Did You Start With Notes vs Physical RE?

10 Replies

I'm sure this is pretty rare but for those of you that started with notes or maybe bought one or two properties then made a full transition to notes, I'm wondering why you chose that route?  Or maybe there's a person that started with one or two notes then fully transitioned to properties and that would be very insightful as well.  I get that these two don't have to be mutually exclusive but when starting out, I believe focus is key.  

Tom, I agree you should not try to tackle both at once, at least not until you have spend at least a few year focused on each. 

I focused on buy and hold for years, and then pivoted to notes. The main reasons I did so can be found in this blog post: 


I may pivot back to buy and hold if/when the market dictates, but right now I am really enjoying notes. 

@Tom Scott

I started with rentals, got up to 10 doors since 2015 and then quickly sold in 2018. Not only did I not value myself enough for PM, but the CapEx and unit turns began to eat way too much in to my "cash flow". Nothing new here but buying distressed property adding value and having ample cash flow to carry you through the value add is how real money is made.

With that said, I knew I wanted a business I could scale more quickly and with greater ease, hence my transition to nonperforming notes full time. 

It’s proven to be the right move for me and the growth opportunities have already begun as I wrapped up our latest exit of nonperforming luxury condo in Asheville, NC. I’ve already been able to triple the cash flow I had in rentals (took 3 years) in under 7 months. 

@Tom Scott

I chose notes after several BRRR properties for because I have family and full time job, trying to oversee contractors and find properties to acquire (I am near Washington DC) was not scalable for me.

So I went into notes which I am working on right now (10:45 pm), I can invest outside of my area at much more affordable pricing and I am managing attorneys and servicers not contractors.

I still have rentals and will acquire more in the future at a later date. Right now I think pricing could use a correction.

I agree with Gary, property Management repairs trash tenants toilets vacancies contractors insurance claims-- I would much rather have my borrower deal with those issues than me. I enjoy much more being the bank than the property owner!

@Tom Scott I did it 2 main reasons.

First was with 2 kids under 3 I don't have the bandwidth in my day to go handle the repair issues. Fully understand the Property Management route, but being able to do most note work via email was a big plus.

Second, I was able to JV into Notes and get good help walking through a first deal. It'll allow me to see if I like it before committing fully into a path forward.

@Tom Scott, I started with owning rentals directly then later moved to investing in notes through my SD IRA. It made sense to me to have notes in the IRA and not "waste" the tax benefits of real estate ownership in an IRA. Like so many other things, personal situations influence our decisions. If I had had the foresight to roll to a Roth when I was younger, my decisions about Real Estate in the IRA would have been different, since Roths have more advantages IMO.

I did both. Since I moved here from Canada, I didn't have a job (W2) and credit, so I couldn't get traditional bank financing to buy rentals. Of course at the time I didn't know about HMLs and other ways to buy properties. But I had enough money to buy 2nd mortgages.

And then, we started building a small portfolio of rentals after foreclosing on some homes and learning some neighborhoods. All in on a home for 40 and rented for $900, I can live with that. Don't need to be a genius real estate investor to make those numbers work. So you're right, they aren't mutually exclusive. In fact I agree with Gordon Moss' theory that they are both very much complementary and owning both is a good thing.

I echo what a lot of others have already said regarding rental management headaches. I started with rentals but realized quickly that using OPM is great for building long term wealth but not great for immediate cash flow returns (another way of saying regular income to put food on the table). I dabbled in fix and flips but found it too difficult to manage with my "day job" at the time.

I found a great business partner who helped me with notes and could handle things when my "day job" interfered. This change was the good fit I was looking for and I've focused on it ever since.

My rental business partner took over day to day management of the rentals, which took 95% of the headaches away.

I think you can start with either real estate or notes and your skills can carry over from one to the other. Like Patrick mentioned, they are complimentary for different reasons. What ratio you should have is up to the individual, I think. I eventually want to be 90-100% in notes

@Tom Scott ,

For me, at first the biggest upside was to build up down payment money to buy a new house.

It took me so long to find a good money partner, who was willing to do it the way I wanted to. Many want to do it their way only, because that's how they were taught. I had a different vision.

Traditional money partners will only give you a tiny finder's fee for giving them such a great deal. Then the next thing you know, they're cashing out on a huge deal, but all you made off of it was $500-$1000, all upfront at the purchase.

I wanted to receive less money upfront, and to receive payments over time for the balance of the agreed upon fee. Ever since I had uncovered what a partial was, I knew that this was the only way I wanted to structure my deals.

For the first few deals, I wanted to have the back end payments, along with $50 a month for 6 months but nothing upfront. I realized early on that many money partners didn't even *know* what a partial was, let alone how to use them.

We tweaked our deals as time went by, and I found the right formula to profiting well by trial and error.

I guess I'm an anomaly in the business. I refused to go along with the status quo, and carved my own pathway forward.