Investing In Notes Is Not A One-and-Done Commitment

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All returns are not created equal. Investing in notes is different than investing in traditional real estate in many ways. The number one difference is the return. Let me explain what I mean:

When you purchase a piece of real estate and hold it for cash flow you get, in theory, exponential returns. As long as the tenant pays you rent, you keep making money. If you decide to sell the property your returns end but you get a nice lump sum of money on the back end of the deal. If you hold onto the property forever there is no number to quantify the returns as they are infinite. Yet, investors who have owned many properties will tell you that the return they receive year over year varies due to vacancy, maintenance, repairs, and changing economic conditions. Still though, rental properties are a preferred means of return for many investors because they enjoy the benefit of not having a set end on their return.

On the other side of the investing spectrum is the note investor. The note investor does all of their work up front.  They crunch the numbers, analyze the underlying property and make sure the return meets their investing expectations. The note investor knows with some level of certainty that the monthly amount they are due to receive is not going to vary much. Note investors do not have to worry as much about vacancy, maintenance, repairs or changing economic conditions. (They do though, if the buyer defaults) The key to being a successful note investor is to be prepared for the next deal. Note investors need to be ready once enough money is built up, to purchase a second, third, and fourth investment in order to compound their returns. Why do note investors need to do this you might ask? Some may say it sounds like a lot of extra work without a passive income wealth-building strategy…..

In reality, it is passive wealth building. It’s taking the power of the monthly payment stream you receive and putting it back to work for you so you can start compounding your returns. By compounding returns you open the door for more investments opportunities and you avoid running out of gas. Note investors do not have the luxury of deciding whether or not they want the investment to go on forever. Each of the investments has a term limit. Once that term limit is paid off, the investment is over. So remember, always build up enough payments to be prepared to make your second investment. If you do that, you avoid diminishing your returns and you are on your way to building exponential wealth!!

Photo Courtesy: Brian Dearth

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.