Does investing in notes make sense with limited capital?

Question

I'm going through the BP podcast and the topic of notes just came up, and I'm somewhat intrigued. I have so many questions (such as, conceptually speaking, how they even work), but I think the most important question I have is as follows:

Should I even be thinking about notes at this point in time?

Right now, I have about 30k in the bank. I've been saving up with the intention to use that money for a BRRRR, and then to do it all over again with the same chunk of money until I have x amount of rental units.

To me, the BRRRR strategy seems very attractive because it allows me to quickly build a portfolio of cash-flowing rental properties (using the same chunk of money over and over again).

But, investing in a note sounds attractive because of the great returns. But if I spend 50k on a note, is there any way to "cash out" and do it again, or something analogous to the BRRRR strategy which would allow me to scale quickly with that initial 50k? Or do I have to save up another 50k from ground zero in order to purchase another note?

Perhaps what I'm really wanting to know is if my strategy of pursuing BRRRR is the best use of my capital at this point in time. The guy on the podcast I'm listening to almost seemed to preach against the cash flow mentality of BP, saying that young people should be more concerned with building capital and less concerned with cash flow. But are the two so mutually exclusive?

Gail Greenberg · Answer

Hi @Lucas Mills, the notes version of using the same money over and over is:

* Buy for 50% of the unpaid balance an owner-occupied 1st lien that shows signs that the borrower wants to stay.

* Get them reperforming (making their mortgage payment regularly again)

* Collect 6-12 months of payments to "season" the note.

* Sell it as a reperformer for 85% of unpaid balance.

So, say the unpaid balance for simplicity's sake is $100K and the monthly payment is $800. You buy the note for $50K, and you have maybe $2000 in expenses for legal, loss mitigation and servicing. Here's what your numbers look like at the end of a year:

$52,000  - note purchase and expenses

INCOME:

$9600 - 12 months of $800 payments$85,000 - sell the note for 85% of UPB

$94,600 - TOTAL INCOME -52,000 - NOTE PURCHASE & EXPENSES

$42,600  TOTAL PROFIT IN A YEAR

That's without any of the complexity of flipping a house. And you can buy a note anywhere in the country because you don't have to be in the area to supervise it in any way.

Cheers!

Dave Van Horn · Answer

Thanks @Odie Ayaga! And appreciate the shout out.

@Lucas Mills

I think Gail is correct in her example, which is a similar strategy to BRRR but with notes.

I think Odie is alluding to other ways to recapitalize such as a collateral assignment of note and mortgage. It's essentially a way to borrow against your note, where you use the note as collateral to secure a loan - similar to a car loan where a car is collateral for the loan. You can then use that loan for another investment while still owning your note (and potentially make money on the spread).

You could also sell a payment stream of your note for a set term to an investor, while still owning the note, which is often referred to as a "partial" or "partial note".

The point is there are several ways to recapitalize, it's really finding what works best for you whether it's hard real estate, notes, or another investment. Personally, I do all the above. In fact the reason I do it is because both hard real estate and notes have their advantages and disadvantages, so I like to find a happy medium. And keep in mind, no matter the investment, the number one piece of advice I wish when starting out was "you don't have to use your own money" to invest.

I know this might not exactly answer your question but I'm afraid there isn't really an answer since it comes down to personal preference, skill set, and the actual investment itself (and it's outcome). But you're on the right track by being on BP!

Best of luck,

Dave

Lucas Mills · Answer

@Odie Ayaga @Dave Van Horn

Thanks for the replies. Great advice all around.

I think I'll stick with hard real estate (BRRRR) for now, for a couple reasons:

1. It's  what I'm most knowledgeable in at this point in time

2. A person who I consider to be a mentor to me is using the BRRRR method successfully, so it may behoove me to stick with learning BRRRR for now

Dave Van Horn · Answer

Sure thing @Lucas Mills, happy to help.

And hey, notes will always be here. If/when you wanna jump into the note space, feel free to PM me.

Also if you want to play around with notes on a much smaller scale (i.e. much less than $50K) you could always do P2P lending with unsecured notes. They're not collateralized with real estate, but you can get started with as little as $25 on sites like Lending Club or Prosper. Since they're so inexpensive to invest in you can really spread out your risk among many notes.

Best,

Dave

Odie Ayaga · Answer

Ah sounds like you might have just listened to @Jeff Brown? Podcast 17? That was a good one I come back to it often!

You may be thinking of something such as a collateral assignment. Don't quote me because I'm trying to learn more about note investing myself so I'm no expert, but the basic idea being that you use a note as collateral for a loan such that if you default on the loan they would get the note. @Dave Van Horn could speak more knowledgably about it (great presentation Thursday by the way!)

Does investing in notes make sense with limited capital?

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