Why would someone invest in real estate notes without a good reason?
People need reasons…and good ones, for just about everything they do. Or, they should!
I mean, if I said go invest in worm farms, or cotton-ball stuffed Teletubbies, you would certainly want to hear a couple of good reasons why your money should be there instead of someplace else right?
Ok, here are five reasons I think you should [strongly] consider investing some of your money in real estate notes.
Reason One – You Don’t Actually Own The Real Estate.
You own the cash flow. The debt. The loan if you will. You are sitting on the correct side of the cash register. – You don’t own the property. You own the note.
“Notes” don’t call their landlords at 3:00am because the toilet is leaking. Notes don’t need a new roof or forget to water the front yard. Notes don’t need new paint.
Nope, you own the note, the cash flow – not the real estate.
Sure, you have a note secured by real estate, but more on that later.
Reason Two – Your Money In A Bank Account Is Dying A Slow Death.
This is just basic math a five-year old can figure out.
The annual inflation rate is somewhere (on average) around 2.1% to 3.8%.
The best rate I could find for a savings account (today) was 1.02%.
Umm, is anyone having trouble with this math yet?
To just maintain your current lifestyle at retirement, you better be at least keeping up with inflation. No chance in a savings with today’s rates!
To make matters worse, I seriously doubt anyone pictured their retirement living “at the same level” as they did when they were working. Bring on the cruises, golf trips to Scotland, wine tasting in France, running with the bulls in…well, you get the idea.
Get your money out of a traditional savings and start earning something you can retire on!
Reason Three – Choose Your Return On Investment.
The next time you wander into your local bank, ask them to change your annual return to 12%… or 14%. Heck, why not even 16% while we are at it?
One of two things will happen.
One, they will laugh and direct you to the “new accounts” manager who will be glad to discuss your “realistic” options, or….
Two, they will give some secret signal to the security guard in the corner and have you thrown out.
When you purchase a private mortgage note, you have some say in what you want for a return and the level of risk you are willing to take.
Want a note with lots of equity? Buy those types of notes. Sure your annual return will be less, but it’s still more than double a “traditional” bank investment.
There is more flexibility in note investing, return wise, than I can go into in this one article. Just know that, as they used to say in X-Files, “The truth is out there.”
Reason Four – You Have A Safety Net.
Remember when I said that you don’t “own the real estate,” you own the note? Well, that part is true.
We like to say that you have all the benefits of owning real estate without actually owning real estate.
Look, anyone can show you a “great investment” with “great returns” – but what happens when things go bad? * What is your plan?
*And sometimes, they do.
Well, here is where the “backed by real estate” kicks in to help you.
You are just like a bank in this case. The real estate is the collateral. If the buyers don’t pay you (for whatever reason) you have the right to foreclose.
Choosing to foreclose (or when) is a personal decision. Maybe you try to work things out for a while with the payers, maybe you don’t.
But, at the end of the day, you get the property back.
You can then re-sell the property for cash, rent it out, or sell and create another note.
Some people say, “When you own notes, you make money. When people don’t pay you, you really make money.”
I suppose that is true in some cases, but I prefer people to just pay when they were suppose to pay and collect the return I expected.
However, lets say you bought a $70,000 note on a property truly worth $110,000. When you get the property back (via foreclosure or quick claim deed), you sell the property and keep all the money. *
*It helps to have all your ducks in a row to be certain you are covered – like be sure the property is insured, you’re named as loss payee/mortgagee, and real estate taxes are kept current.
Reason Five – Because I Said So… (But Don’t Take My Word For It).
Ok, you probably have not heard that reason since your parents wouldn’t let you jump off the roof with your makeshift Superman cape.
Look, some of you reading this don’t know me from Adam. And, because of such, you should do your own homework.
This site has hundreds of articles about the note industry. There are three basic participants.
Sellers – People who have notes. These were usually created to facilitate a sale of real estate. Most likely they would have preferred a lump sum of cash…and still do.
Investors – People who buy notes for investments. They range from private individuals to major corporations that understand the benefits of a higher yield backed by real estate.
Brokers / Consultants – These are people who don’t necessarily have money to invest, but want to earn a commission by putting both the Funder and the seller together. Although no formal training is required, it can make the difference of success or failure in the industry. Finding Cash Flow Notes Training is a great, and affordable, course to learn the industry*
*Full Disclosure – We wrote the Finding Cash Flow Notes course and have over 40 years combined experience. All this led to creating the number one online note training of it’s kind.
So there you have it…
Five good reasons to quit crying over your bank statements, perusing the Wall Street Journal for Gold Seminars in your area with a free lunch, or ways to make a million dollars selling stuff on eBay.
The time to learn about the note industry is now.
Marc Faulkner says
I agree that Note Brokers should strive to become note buyers. I also appreciate a broker that has the ability to look at a note “as if” they were using their own money. Way to many brokers only collect the basic information, without getting a copy of the actual Promissory being offered for sale or the HUD1/Settlement Statement. At the bare minimum, I think a consultant should collect these two documents from the seller, prior to completing the Quote Worksheet. It is next to impossible to put together an accurate Worksheet without getting the actual numbers off the actual docs. Otherwise you are just taking the sellers word for it. If they are serious about selling, they will be happy to provide you with any documentation you need to get the job done!
Tracy Z says
Great comment Marc! I agree. If a seller questions why I am asking for copies of documents when others haven’t I explain I am serious about buying their note and to provide a real evaluation it helps to see the documents. It’s a little more effort for the both of us but we all get better results.
It also helps if brokers do a little legwork by going online and pulling the current real estate assessor’s data and property tax status. Even if the seller doesn’t appreciate the extra effort the investor sure will. It helps your quotes get moved to the top of the pile! Plus, as investors we tend to fill in the blanks with the worse case scenario (a hazard of the trade) so it is better to have as many answers upfront.
Paul Davidson says
Good point Marc. Just in case anyone needs to fill out a Form HUD-1, I found a blank form here http://goo.gl/rdSGks. This site PDFfiller also has some tutorials how to fill it out and a few related forms that you might find useful.