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

[Chris Seveney]

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]

Quote from @Shafi Noss:

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

Wow, great  and involved question

Note 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.