Since many people consider me this note guy, I’m often told that I must like investing in notes more than in real estate.
And to be quite honest, nothing could be further from the truth. I still love investing in real estate; it’s just different than investing in notes. They’re different investment vehicles.
One is a paper asset (notes) and the other is a hard asset (real estate), sticks and bricks. They both can be used to build wealth, and they both have different tax treatments as well.
Sometimes, when I’m first explaining the note business and the idea of mortgage servicing to people, I use the analogy that mortgage servicing is like property management for a note and mortgage.
The reason I say that is because the role a servicer can play for a note investor is very similar to that of a good property manager for a piece of real estate. For example, a good property manager will assist the real estate investor in many ways. They’ll help find a tenant, screening them by running a credit, criminal background, and eviction history report.
They’ll collect monthly payments, send late notices, and even assist with eviction. Some managers will even make mortgage payments.
When my brother was stationed abroad, his property manager did everything for him while he was away, including taking care of the normal maintenance and move out repairs.
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How Is A Mortgage Servicer Similar?
If a loan is performing, or re-performing, the servicer will collect monthly payments, send late notices when necessary, and will have online access not only for the borrower for the investors as well.
Not only are they compliant and licensed, but they’ll send the proper letters and privacy notices as well as abiding by the CFPB (Consumer Financial Protection Bureau). Besides monthly statements and ACH capability, they also do any escrows that may be required, as well as any year-end accounting that’s necessary for the borrower and investors, such as 1098’s.
The cost for such services is very reasonable. Servicing setup is typically in the $40-$60 range with monthly fees of approximately $15- $18/month. This flat fee is the same whether the note payments are $300/month or $3000/month. This is much different than property management, which can run from 8% to 10% on a normal rental.
Vacation areas can be as high as 30% of gross rent collected, and you may see volume discounts, but it’s rarely lower than 6%, regardless of the number of units. This is probably because mortgage servicing is much more automated and scalable than property management for real estate.
If a loan is non-performing, a servicer’s monthly fees can be much higher (e.g. $90-$95/month), or instead of a flat fee, it may be a percentage of money collected towards arrears and payments.
The biggest expense for non-performing notes is usually legal, and the fees are in addition to that (approx. $2K- $3K for an uncontested foreclosure). This may sound high, but keep in mind that it’s comparable to a property manager in real estate managing a full-blown rehab project. Most property managers won’t take that on.
Why Consider Outsourcing These Services?
When I think back on my own experience in real estate and note investing, the hardest thing to give up was what I had done for myself.
For example, after college I have my own painting company and I had renovated hundreds of houses. So, naturally the hardest contractor for me to hire was a painting contractor.
I was a perfectionist, so I struggled to find someone to do the job as good as I would. The same thing went for property management. At that time, I was an investor-realtor, who did property management at RE/MAX and that was my specialty, so to me, no one did the job quite the same as I would myself.
But, an experienced investor told me a long time ago that if you can find someone to do the job 80% as well as you, you need to think about giving it up.
For example, if you’re a high-income earner, is it really worth you doing the property management? It was these realizations that eventually got me to outsource these tasks, and I’ve been able to make more and more money since doing so.
I felt the same about outsourcing loan servicing. Years ago, I serviced my own loans. Today, I realize how penny wise and pound foolish that really was, especially with all of the new compliance regulations and the ease of using note servicing software.
So, even though it’s easier to outsource all of these tasks for both investments, if you asked me which one was easier (not necessarily which one I like better) I would have to say loan servicing. This is something banks figured out long ago. If you notice, they don’t own millions of properties, but they do own millions of mortgages. It’s much more scalable.
So tell me, which one do you like better, and more importantly, why?
Be sure to leave your insights and comments below!