How to Get Started in Real Estate Notes: A Primer for Investor Newbies

Recently, I wrote an article introducing those that aren’t familiar to the world of notes (“An Introduction to Investing in Notes: Why You Should ‘Be the Bank’”). And, as promised, I’d like to follow up on that topic by addressing a few commonly asked questions about note investing and discussing how you can be successful with or without quitting your full-time job or necessarily having to pay a high priced guru. Whether it’s getting started with notes, or any other endeavor for that matter, I firmly believe there are three things that can help you to be successful:

Get educated in the space.
Build relationships with others in the field.
Find a mentor or coach (if you really want to accelerate things).

Do I Need to Pay a Guru to be Successful in Notes?

The short answer is no. But it also begs the question, how should I educate myself?

For me, I didn’t really pay a high priced guru to learn about delinquent second mortgages, but I think it was more of a function of the fact that no real gurus were teaching it.

I was first introduced to notes at my REIA group where I learned about private money and hard money and attended some workshops from a few guru-like real estate professionals.

As for the delinquent second lien space, I was really taught the collection side of the distressed debt business by my note seller. And to be quite honest, I paid a lot more than a guru fee in expensive notes — and notes that were never delivered. That being said, it truly was a learn-by-doing business for us, and it probably took us much longer to learn the business back in ‘07 than it does for most people today with all the information available on the web. It also depends on the individual. Some folks are good at teaching themselves, and some are not and may need more prodding than others to take action. But there really is a ton of information available today.

Join Some Groups

The first place I’d start is to subscribe to the Tax Liens, Notes, Paper, & Cash Flows Discussion Forum on BiggerPockets. This is a great forum to ask questions and learn from others who are not only just starting out in the business, but there are also plenty of experienced note investors on the site. You could also join some online groups, too. For example, I run a Distressed Second Mortgages Group (DSMG) on LinkedIn, and many folks actually buy and sell their notes on this platform. There are many groups on Facebook, as well as many note and real estate groups organizing their events with Meetup.

Next, try to check out some of the note conventions, and be sure to ask others on BiggerPockets which events and programs they are going to and/or have liked.

Can I Invest in Notes While Working a Full-Time Job?

Unless you line up a trade between a note fund and a bank for a large commission, investing in notes is really not a get-rich-quick scheme. I’ll admit that you can make a nice living and find some great notes to invest in, but for me, the real fun started when the cash flow from my notes started to buy me more notes.

You can certainly be successful investing in notes part-time. I’ve been doing it for several years, and the reason it’s so easy to invest in performing (or re-performing) notes is because the servicer, who collects the borrower payments, really does the bulk of the work, including all the accounting and tax reporting.

As for non-performing notes, I had a full-time job and things were cool until I got up to about 25-30 notes (with no assistant). Keep in mind, I had some flexibility in my full-time job and could make phone calls and such if I needed to. After about 30 loans, you may start thinking about possibly going full-time.

Can I Invest in Notes With No Money?

It does take money to buy notes, but the short answer is no, you don’t really need any of your own money. If I really think about it, PPR was almost completely built with OPM (other people’s money), as we had very little capital when starting out. Other than the first couple notes my partners and I went in on just to see if we could do the business, the bulk of the money came from investor capital raised through private placements.

As for many of my colleagues and friends, they’ve employed various strategies for launching their note businesses. My one friend ended up becoming a servicer himself. One girl joint ventured with investors in a first lien fund. One built his business by brokering. He would put deals together by grouping individual note buyer capital to make larger purchases from a note fund, and he would make either money, free notes, or just cheaper notes for himself. Another friend, who became super proficient at the workout with the borrowers, just assists others who have the capital and loans to execute efficiently on their deals.

So, whether you’re using notes to pay for your expenses or your buying notes for the long run in your self-directed retirement account, with a little education, research, and some networking with folks in the business, your note success is really just around the corner.

Have you added notes to your real estate portfolio? What questions do you have about this form of investing?

Leave your comments below!

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