Sit around any after-hours event at an industry convention and you will soon find a heated debate about investing in Real Estate vs. Private Mortgage Notes.
Oftentimes people are in one camp or the other (myself included). But which one is better?
Well, “better” really depends on your personal investing style.
Are you the kind of person that needs to see and feel the asset? Do you want to drive by the property on a regular basis to be sure that it has not burned down?
Or, are you the kind of person that would like to simply track your investing gains in an excel spreadsheet?
Certainly there are pros and cons to both real estate and note investing.
On the real estate side, you have the opportunity of a significant uptick in value through appreciation. Conversely, you can also experience a significant decrease in value. (We can all feel the recent sting from the last downturn).
For me, Real Estate is stuff.
It is a hard asset that needs to be maintained. If you are renting it out, you have tenants. If you are under the impression that tenants simply mail you checks every month and you don’t hear from them often… guess again.
Anytime something is happening with the property they are quick to dial-up the landlord.
Toilet is plugged up.
A gutter came off the roof.
The mailbox is broken.
My kid broke two windows.
You name it – it will happen.
Aside from the constant communication with a renter, you also have a property that needs constant upkeep. The roof, paint, landscaping are just a few of the common ones and that’s forgetting for a moment the property taxes and insurance.
Yep, real estate is work.
For me, Notes are the best of both worlds.
The reason I like private mortgage notes so much is that I feel you get the best of both worlds.
Notes are typically secured by real estate. The asset is the home, business, or land…and you always have that collateral to go back to.
Secondly, you don’t get the calls.
When was the last time you called your bank when the water heater broke or the roof started leaking?
Well, you don’t. I mean you could call them but they would just laugh and say, “Bummer, don’t forget to mail in your mortgage payment.”
With notes you are effectively the “bank.”
If everything goes according to plan, you will receive checks each and every month – all the while earning a pre-determined return on investment.
IF something was to go wrong (as in the buyer stops paying) you have every right that a typical bank does. You can foreclose on the property and sell it for cash (or create another note).
Lastly, with notes, you have a much better way of minimizing your risk. You have may have a $130,000 property as the underlying asset, but only be in the deal, say, $50,000 or 38% Investment to Value – Pretty good likelihood on not losing your money on that one!
Yep, for me, Private Mortgage Notes afford the investor a flexibly like no other in the real estate market. But, I am sure we can debate this the next time we meet. 🙂