Want To Know More About Note Investing - Ask Me Anything?

Question

We get asked a lot of questions on note investing, and we always are assisting newer investors on what note investing is. There are a lot of other really smart people on BP in this group as well who can answer questions related to note investing. So if you have a question feel free to ask it below.

Don Konipol · Answer

Wow, great and involved questionNote investing, just like investing in real property, covers a very wide spectrum of risk and return. Purchasing notes in default, without knowing the property condition, in states where laws favor debtors and renters, could be extremely high risk and extremely high returns, or, total wipeout. Purchasing performing notes with the debtor being a high credit individual and secured by low loan to value on well located property can be very low risk, albeit much lower return.Overall, I think the spectrum of investments in Notes is similar to the spectrum of investments in real property. But here’s the difference; note management is significantly less involved and less difficult than property management. The other difference is that unless one is buying notes to foreclose and obtain property ownership, then property investing has a growth net inflation hedge that note investing does not.I have 4 or5 notes, total principal remaining about $550,000 that I bought 6-9 years ago, and have been collecting 10-14% annual interest (on invested capital) since with virtually no time commitment. The borrowers pay by ACH, are almost always on time, and I escrow for taxes and insurance. Other notes I own require a more “active” approach, with everything from late payments, requests for forbearance, increased principal for repairs and repositioning, etc. So, I can provide you with my personal experience, which is reflective of my personal risk/reward tolerance/objective.One half my real estate portfolio is invested in notes, average annual return by interest is about 12%. I’ve actually done better as some early payoffs reflect full principal while I purchased those notes at a discount, sometimes a large discount. Since I also invest in notes we originate I don’t always have the opportunity for the “windfall” profit.The other half of my investments are in real property using 50% leverage. The effect is that the gross value of my real property holding are equal to the amount of my total investment in both notes and property (because of the leverage), thereby theoretically hedging my entire investment against inflation risk.I don’t invest in residential property or residential notes at all, all my investments are commercial real estate or secured by commercial real estate only. While I prefer income producing property both as direct investment and security for notes, I do invest in land plays and in notes secured by land (at a very low LTV). Liquidity for PERFORMING notes is much greater than for real property, as plenty of real buyers ready to pull the trigger immediately. Both are ultimately scaleable, but note investments require less “people” involvement.

Chris Seveney · Answer

Sorry - yes there is a big risk variation between non performing and performing notes, which is why there are different return profiles. For a performing loan 8-12% is common and for a non performer 15-30% is achievable. of course higher risk profile should lead to potential for higher returns. If you raised cash - depending on how you do it, you are not personally responsible like you are when you get a loan from a bank. Even if its from a private lender for LLC or a bank, most require a personal guarantee. For managing a non performing note, it depends on your team and you as well as the borrower. I have had loans that i spend very little time on and others that are so painful as they suck up all your time. If anyone tells you this is easy or can be done and scaled quickly, they have never done it.

Chris Seveney · Answer

Range of Risk - I would comment that it is the same risk or slightly less risk than traditional real estate because you typically do not have leverageReturns - For non-performing assets, they can be comparable to traditional real estateLiquidity - Low liquidity similar to real estate. Closing time is approx. 2-3 weeks so much faster though to exit than traditional real estateScalability- Biggest difference - very difficult to scale. You cannot get loans from a bank, so you will need to have capital or be able to raise capital. Also most are not familair with it compared to a traditional syndication in MF so that can make it more challenging. I believe it is less time to manage than other areas of real estate.

John Underwood · Answer

The last 5 houses I have paid 29k or less for each and rent between 1k and 1.5k. Hard to find in this market but I can find them or buy them at auction. Fixup cost range from 20k to 35k. I make them nice. I use all cash. I mainly have LTR's and two vacation rental properties. One on a Lake, one in the Pigeon Forge mountains. These 2 have mortgages, my others do not. I also own multiple LTR's in 2 different ROTH IRA's. I love not paying tax. I also loan money out of my ROTH when I have too much cash and I am in between purchases. I flip houses when the opportunity arises. I am having fun doing what I am doing. I retired early from my Electrical Engineering job. When you don't need any more properties, they seem to find you anyway.

John Underwood · Answer

I might want to get into Notes one day. Right now I am making way more money than what Notes can provide so I am pulled to 200% returns that I am making and buying rental houses that pay off in just a few years and cash flow $1,000 or more per month. I always want to learn more about any and all RE investing opportunities. I never read a fiction book, too much to learn.

Shafi Noss · Answer

How does the range of risk, return, liquidity, time commitment, and scalability compare to other styles of real estate investing?

Shafi Noss · Answer

@Chris Seveney A bit surprised to hear that on the risk, would've thought performing and non-performing notes would have pretty different profiles, and non performing would have higher risk than traditional RE by which I assume you mean simple buy and hold. Interesting to hear that's not the case. A few followup questions, you said there was less risk because of no leverage, and also that it's difficult to scale because cash is needed. If you raised cash that would be similar to leverage, right? So if cash was raised is the post-raise/leverage level of risk on performing and non performing notes still similar to past leverage traditional buy and hold?Also on scalability, I understand your point about scalability being limited by capital raised. My understanding is that for nonperforming notes, value is added basically by buying at a discount and bringing the note back up to performance, or foreclose and take a spread on the asset. Is the time spent to do those less than in other areas of real estate or just once they are stabilized?

Chris Seveney · Answer

you should start the company before you but the note. I can refer you to an attorney if you send me a PM. The business setup is also based on your other businesses and should have input from your CPA as well.

Jay Hinrichs · Answer

John since your loaning money ( I have to assume secured by real estate) your already in the club !!! I love your strategy for your rentals its deductive reasoning and being all cash that creates that great play your doing IE think out of the box and take a risk but a very very limited risk given the locations and assets.

Jay Hinrichs · Answer

if your going to do this as a business in CA you need to be licensed.. either as a RE broker Mortgage broker or consumer finance license. check the regs.