How to Invest in Real Estate Without the Hassle of Tenants & Property Management

by | BiggerPockets.com

Often, fellow real estate investors ask me why I do notes or how I got into the note business. The truth is, though, that just about everyone is in the note business. People oftentimes have car loans, student loans, credit cards, or mortgages. It’s just that they’re usually writing checks to banks instead of receiving them “as the bank.”

For me, becoming interested in notes happened almost by accident as my investing career evolved.

At first, I was a real estate agent and a painting contractor who just happened to have good credit and the skills to fix up properties — and I thought the only way to get rich was by working hard and investing in physical real estate. At that time, I hadn’t realized that all cash flow isn’t created equal.

tax-strategies

Related: The Top 5 Resources to Educate Yourself on Real Estate Note Investing

Owning Notes vs. Property Management

It wasn’t until I joined a real estate networking group that I discovered hard money, private money, and seller financed notes, along with other new concepts and strategies, such as owner financing and carrying a second mortgage as the seller.

As I was looking to expand my personal portfolio of buy and hold properties, I was running out of options with residential loans. It was either commercial loans with tougher terms, more fees, plus tighter margins due to lower cash flows, or I had to get more creative with things like lease options, “subject to” deals, and private financing.

The real game changer for me was realizing I could lend out money from my IRA and from HELOCs (Home Equity Lines of Credit) that I had on all my apartments and SFRs (Single-family Residential Properties). The yields were nice (15-18%, one year interest only, oftentimes with points), and I had several friends who could put my money to work. As my portfolio of short-term rehab loans grew, it became too obvious how easy this type of cash flow was to earn compared to property management.

At the time, I had 40 units of my own, and I was managing approximately a hundred units as a RE/MAX agent. Property management took a lot of time. I had to deal with tenants, repairs, contractors, townships, inspectors, and eviction court.

With notes I had to deal with a homeowner/borrower, but not with repairs, townships, contractors, or inspectors — and I rarely dealt with legal situations like court.

I quickly noticed that this other form of cash flow backed by real estate without tenants was pretty cool. Up until this point, I managed properties for over 15 years the old-fashioned way, and I had even gone into commercial properties like mobile home parks, storage centers, and commercial office condos all in an effort to get away from the typical tenant. But nothing had compared to the ease of note investing.

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Related: The 8 Non-Negotiable Habits of a Successful Note Investor

Advantages of Notes

There are many advantages of note investing besides just cash flow. One is that you can start with deploying a small amount of capital. For example, some peer-to-peer lending companies allow you to purchase partials, or portions of a note, for as low as $25.

Another advantage is that you can enjoy increased liquidity. Notes can be sold or recapitalized very quickly. You can even borrow against the note using a Collateral Assignment of Note and Mortgage. You can also sell a partial.

Although you don’t have depreciation deductions like you do in hard real estate, it’s still much better than earned income, tax wise, since it’s considered passive. It even has what I call “phantom appreciation.” This isn’t appreciation in the true sense of the word like in real estate, but if you own a partial equity note and more equity comes back in the marketplace, suddenly your note has become more valuable. Notes with a discount also have the potential kicker, which is the difference between the purchase price and the payoff, if the borrower were to pay off early.

As you can see, owning notes can be a very scalable way to increase cash flow.

[Editor’s Note: We are republishing this article to help out our newer readers.]

So, what types of cash flow do you like?

Be sure to comment below!

About Author

Dave Van Horn

Dave Van Horn is President at PPR The Note Co. – an operating entity that manages several funds that buy/sell/hold residential mortgages, both performing and delinquent. Dave has been in the Real Estate business for over 25 years, starting out as a Realtor and contractor and moving onto everything from fix and flips to Raising Private Money.

70 Comments

  1. Dave Van Horn

    Hi Krishna,

    NNN property may also be another headache free strategy, but in my experience I never had as high of a yield with them as I’ve had with even re-performing notes.

    Can I ask, what is it about notes that scare you? Maybe I can alleviate some of your questions/concerns.

    Best,
    Dave

    • At age 75, cannot take any chance. NNN gives me 5% guaranteed by corporate lease Walgreens. Let heir worry after me, they can extend lease for 50 more yr with 0 mtg to pay or sell and land is worth at least a million.
      kris

  2. Steve Vaughan

    Was so afraid this was a sit back and let a PM take care of everything for you article! Had a check and make sure lol.
    Good article again, Dave. I haven’t done notes yet, mainly because of tax treat!ent on interest income, but a good re!onder of an alternative RE investment vehicle!

  3. What the author leaves out is what happens when the note does not perform. For the most part, the buyers of the houses underwritten with private mortgages ( notes) are not the folks that waltz into Chase or Bank of America and get a loan. Many of the buyers are good people, maybe self employed that cannot get traditional loans. Others have high debt to income or past issues with credit. There is usually a reason why they are paying higher rates and/or points to obtain a loan.

    Unlike rentals, the foreclosure process is very long and cumbersome. It may take years to get the property back and who knows what it will look like.

    These notes sell to other investors at a substantial discount. They can be sold, but this is not like buying a Treasury Bond.

    Like all real estate, Investor beware. The article would be more credible if the author would paint a more realistic picture of this business. I have made money doing this and I also have a crappy house in a crappy town that I took back because the note did not perform.

    • Dave Van Horn

      Gary,

      Thanks for chiming in! And you’re absolutely right, I only spoke about the advantages of notes. The goal of the article wasn’t to outline the entire investment (warts and all) but rather to show a more scalable way to cashflow. But, point taken, the disadvantages would make a great topic for my next note article.

      Also just want to point out that when I create private notes for people I usually know the borrower very well so they have standup credit, not to mention experience and track record with RE. But to be clear, the notes I’m referring to in this article are institutional, so they’re quite the different animal for a variety of reasons.

      And to play devil’s advocate on the other points you mentioned:

      Foreclosure definitely can be a long and arduous process (just like a drawn out eviction can be) BUT Foreclosure is also very state specific. So it’s not always a long period of time (like in states such as TX and GA for example) and these longer timelines could also be avoided (or planned for) if you were to buy in certain areas and with certain strategies. And in many states, with vacant properties you can accelerate the FC process dramatically.

      Also, notes do not always sell or re-sell for a deep discount. I’ve owned many a note that had sold for more than what I paid for it. For example, I’ve had notes become more valuable the longer I held them due to the fact that it now had established a greater pay history. I’ve also had the property backing the note go up in value, which is why sometimes no equity notes can make sense for certain investors in certain markets.

      But you’re correct, investor’s shouldn’t just jump into the industry only expecting rewards without the chance of risk. I’ve owned some crappy houses myself, fortunately I can say that the more I’ve done the business and the better I’ve gotten at it, the less likely that scenario becomes.

      Best,
      Dave

  4. Krishna Patel on

    Slow n steady, first investment in ,8 units, not good area in 1970. Moved to 12 units, got CVS in ,1031 X, sold got Walgreen in 2010. They were giving you 10 % more in loan than purchase price, simply because loan guarantee by Corporate. But need to put down to get cash flow
    Did go thru toilets problem, stealing managers etc

    • NA Chanpong

      You were lucky to get into those NNN properties several years ago. Nowadays, almost all NNN properties are way over priced for what you get in return. A lot of times, the price is about double what you should be paying for that property in today’s market. Imagine the surprise you will be if you live long enough to get the property back 15 years from now and have to rent it all over again. NNN property is the biggest scam for today’s seniors and not too many people realized that…

      • Krishna Patel on

        Not true. It is a corporate Walgreen’s ,25 yrs guarantee. After that property is free n clear. Land worth a million at that time. You are right in price, may be 30% more but rates are dn too.

    • Dave Van Horn

      Kris,

      I’m with Steve, congrats on the NNN. My article certainly wasn’t written to dissuade others from NNN but for those without that specific option/path or for those who want to make more than 5%, maybe notes can work for them.

      Also, no toilet problems or stealing managers with notes! Just saying 😉

      Thanks for commenting.

      Best,
      Dave

  5. Rodney Walker

    Hi Dave,

    I’m sure you probably hear this a lot about your articles but really…Great stuff! Just a quick note on where to get your ebook on note buying. I have a nephew that is just getting into real estate investing and bought his first rental. He is starting to see some of the “cons” of owning property with tenants. I’m trying to bring him from the “dark side” of investing and would love to get this ebook in front of him. And I’m not going to lie, I’m also interested in reading it after recently reading a lot of your posts and listening to your conference call this week.

    Thanks in advance

    • Dave Van Horn

      Hi Ashton,
      I’m glad to hear you’re interested in notes. There are several books on the general concept of investing in notes, such as Jim Napier’s “Invest in Debt,” and George Antone’s “Banker’s Code.”
      I’ve written past articles on notes as well. Also, I do have some additional free resources I can offer, including a free copy of our Introduction to Note Investing eBook. If you’re interested, just shoot me a private message, and I’ll send you the links.

      Hope it helps!
      Dave

  6. Nancy Dumon

    Hi Dave,

    I discovered ‘Notes’ investing in one of the BiggerPockets podcasts. It seems rewarding but I am not clear on the risks. Can you recommend best resources, books, and articles to learn how to get started? Thanks!

    • Dave Van Horn

      Hi Nancy,
      I’d be glad to send you some free resources in a private message, including a copy of our Introduction to Note Investing eBook. Some other books on Note Investing include those I mentioned above to Ashton. Are you interested in investing in notes in a more passive way (performing notes) or more active way (non-performing notes)?

  7. Bruce Coleman

    Thank you Dave for taking the time to write this article. You have sparked my interest in learning more about notes investing. Is there a book on notes investing equivalent to “Rich Dad Poor Dad”?

    Thanks again,

    Bruce

    • Dave Van Horn

      Hi Bruce,
      There are a few books on the overall concept of investing in notes, such as Jim Napier’s Invest in Debt, and George Antone’s Banker’s Code. I’ve also recently written an eBook as an Introduction to Note Investing. If you’re interested, just shoot me a private message, and I’ll give you a link to a free copy.
      Hope it helps!
      Dave

  8. nicole rivers

    Hi Dave,

    Great article. I’m new to investing and learning about the different avenues available to invest and get great returns.
    I have been trying to get my sister to think about REI in a new way as her health no longer allows her to do the physical work and stress of flipping. I would love to pass on some resources and maybe a copy of your ebook to get her thinking about notes as a method of investing that could work for her. Also, I’d love to read a few books on the topic myself 😉

    Thanks in advance!

  9. Jennifer King

    Hi, Dave! I like to imagine myself owning a small rental empire one day, but my more cautious husband would love for me to set my sights on a more tenant-free REI goal. Would you mind sending me the link to your e-book on investing in notes?

    And since you went the whole real estate agent route before getting into notes, I wonder if you could comment on whether you’ve found that training useful despite later shifting your focus to notes? (I am considering taking the courses required to become a real estate broker in WA, though I truly have no intention to work as a broker. I just imagine the information will be broadly applicable to my future REI. Would love to hear if you have any opinion on that.)

    Thank you!

  10. Daria B.

    Hi Dave,

    I found this article today in some back issues I’m catching up with. Hopefully you will get this and I can find out some things to close the gap in my learning about notes.

    I too am looking for resources, I purchased other RE books regarding purchase of RE, for note buying. I recently joined a local group but they are further along in the note purchasing arena than I am and I am trying to catch up.

    Can you recommend any resources for a beginner?

    Thanks
    Daria L. Bullock

  11. Joshua Smith

    Hi Dave

    I’m new to REI and would like to know more about note investing.  What are the basics of finding and evaluating good note deals?  What are some typical methods of funding a note purchase? I would like to read your ebook Introduction to Note Investing.

    Best Regards
    Joshua Smith

  12. Helen Kirk

    Hi Dave, I liked your article. I have virtually no exposure to investing in notes, but after reading your article, I am looking forward to learning more about them. I own a few rentals, and am considering purchasing a foreclosure to learn to flip properties. I had to rehab my first rental, and really enjoyed the process.

    haven’t had any problems yet with tenants, but I know that will come in time. Not sure that I want to have a lot of rentals at this point. I would really like to read your ebook on Introduction to Note Investing. Could I get a copy from you?

  13. michael dworman

    I don’t think it is correct that the interest income from the notes are passive . It is interest income just like earning interest from a bank account. I don’t think you can offset interest income from notes against your real estate losses.

    • Dave Van Horn

      Hi Karl,

      Unfortunately there aren’t that many!

      “Invest in Debt” by Jimmy Napier is a good baseline for understanding the concepts of debt and for years was the only book on notes around. I’ve also heard many investors on the site speak highly of “Paper Profits” by Joshua Andrews, a fellow BP member.

      But other than that, there isn’t much to my knowledge. This is precisely why I decided to write one. So as sort of an expansion of my Intro to Notes E-book (as well as featuring a slew of other note concepts), with the help of BiggerPockets Publishing I will be releasing a book on note investing this Spring. So stay tuned for more news about that as we get closer to April!

      Best,
      Dave

  14. Dave,

    I really love your articles. I am a PML and I work with a mutual friend (out of Trenton, NJ) for most of my deals.
    However, I’m having trouble utilizing all of the capital available to me in a manner that feels… safe?

    I don’t want to have all my money with one person…Nor do I really want to go out to find people to lend money to.. Also, I have zero intention of owning my own properties. I have enough fires to put out on a daily basis with my business.

    What do you recommend for someone in my position? Also, would love a copy of the e-book you’re PM’ing people.

    • Dave Van Horn

      Hi Sunny,

      Thanks for reading. Will definitely be sending you over a copy of the E-book asap.

      As for your other question….Your situation is a common one. And when I’m asked this question the trouble with developing an answer is there are quite a few variables that I’m unaware of. So what i don’t know is:
      – are you maximizing your qualified plans?
      – how are you managing the current debt you have, if you any?
      – have you done anything to limit your taxation?

      After that, there’s still really no one size fits all answer but it’s a reminder to “get your house in order” so to speak before diving into an investment. As for the investment itself when you get to that point, it’s really about how much risk you want to take on vs. how much yield you want to make? It sounds like you’re like me and want to stick to more passive vehicles at the moment so maybe an apartment fund or a note fund would better for you than something more active.

      I’d also suggest looking into things like the 506 Investor Group (who are a group of passive accredited investors who share and discuss due diligence on crowdfunding & syndicated real estate investments online). I’d also give Dr. Kenyon Meadows BiggerPockets podcast episode a listen. He’s also a busy guy who invests passively in a multitude of things:

      https://www.biggerpockets.com/renewsblog/bp-podcast-219-private-lending-turnkey-investing-crowdfunding-real-estate-dr-kenyon-meadows/

      Hope this info can be of help.

      Best,
      Dave

  15. Adam Hopkins

    Hi Dave,

    Can you explain this a little more clearly?

    “It even has what I call “phantom appreciation.” This isn’t appreciation in the true sense of the word like in real estate, but if you own a partial equity note and more equity comes back in the marketplace, suddenly your note has become more valuable.”

    Why does more equity coming back into the marketplace make your note more valuable?

    Thanks!

  16. Pyrrha Rivers

    Hi Dave,
    Thank you for yet another excellent article. I followed the link you provided and requested your ebook.
    I do want have a question about the HELOCS you had on all of your investment properties. I have one that I love but was under the impression that you can only get a HELOC on your personal residence. Can you please tell me who provides HELOCs for rentals?

    Best,
    Pyrrha

    • Dave Van Horn

      Hi Pyrrha,

      Thanks for reading, appreciate the kind words.

      And the answer to your question, is really to just shop around. I have HELOCs on my rentals, the most recent of which I found through Wells Fargo. But everyone’s situation is different. They used to be much easier to get, then when equity fell after the ’08 crash they were tougher to get. But now that equity is coming back they’re becoming more prevalent again. Might want to try credit unions as well as banks.

      Best,
      Dave

      • Pyrrha Rivers

        Thanks to reading your article, I went looking and yes, I found out that Wells Fargo offers HELOCs on investment properties. I asked twice before but this time I was speaking to someone in the actual HELOC department, got the correct answer and placed an application.
        Thanks!

  17. David Noll

    “Yeah, but…”
    Although the title says this is a way to invest in real estate, you really don’t get any of the benefits of real estate with this investment. There’s no leverage, no appreciation in value, and no depreciation. The principal value that is being corroded by inflation belongs to you, instead of the bank. I’m not knocking notes, and they may be a good diversification strategy, but they’re not really real estate. (At least, until they default, and you have to seize the property.) Thanks for the article!

  18. Marvin Lusky

    Dave,
    Like many here who have commented on your article, I’m intrigued by this type of investment and would love to learn more. As I approach “retirement” I’m looking for more passive income streams and this seems like a great option.
    Any suggestions about where to get additional info is appreciated.
    Regards,
    Marvin

  19. Jiri Vetyska

    Dave,
    Would you mind to clarify somewhat?
    There is tons of regulation and tons of paperwork, and you kind of said you need a servicer (as that would be a lot to take to handle the servicing of the loan).
    Then you also say you personally handle non-performing loans and deal with the homeowners – but you probably cannot do this a private person, but rather as a business entity, is that correct? Or is that normal that people get letters from some guy asking to pay off the loan?

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