Skip to content
×
PRO
Pro Members Get Full Access!
Get off the sidelines and take action in real estate investing with BiggerPockets Pro. Our comprehensive suite of tools and resources minimize mistakes, support informed decisions, and propel you to success.
Advanced networking features
Market and Deal Finder tools
Property analysis calculators
Landlord Command Center
$0
TODAY
$69.00/month when billed monthly.
$32.50/month when billed annually.
7 day free trial. Cancel anytime
Already a Pro Member? Sign in here

Join Over 3 Million Real Estate Investors

Create a free BiggerPockets account to comment, participate, and connect with over 3 million real estate investors.
Use your real name
By signing up, you indicate that you agree to the BiggerPockets Terms & Conditions.
The community here is like my own little personal real estate army that I can depend upon to help me through ANY problems I come across.
Tax Liens & Mortgage Notes
All Forum Categories
Followed Discussions
Followed Categories
Followed People
Followed Locations
Market News & Data
General Info
Real Estate Strategies
Landlording & Rental Properties
Real Estate Professionals
Financial, Tax, & Legal
Real Estate Classifieds
Reviews & Feedback

Updated over 1 year ago,

User Stats

17,556
Posts
15,152
Votes
Chris Seveney
Lender
Pro Member
  • Investor
  • Virginia
15,152
Votes |
17,556
Posts

Some Due Diligence Basics on Note Investing

Chris Seveney
Lender
Pro Member
  • Investor
  • Virginia
ModeratorPosted

Recently, been seeing more and more online posts of performing mortgage notes on the secondary market as one-offs with a rise in individual investors presenting "anticipated returns". The numbers invited a closer inspection, leading me to share some key insights for those of you involved with performing mortgage notes. Here are some critical considerations:

1. ROI: While it may seem attractive initially, remember that your asset, the note, loses value as the principal goes down. Take for instance a loan with a balance of $12,000 at 0% interest, paying $500 monthly for two years. Despite an ROI of 50%, you'll net no profits after the two years. The solution? Understand the yield or the internal rate of return (IRR).

2. Monthly Payments: Be cautious of sellers basing returns on monthly payments. This can be misleading as it often assumes no fees. In reality, you will at least have servicing fees, which can consume up to 10% of a payment, particularly for loans under $500/month.

3. Loan Constant: It's crucial to grasp this concept. The lower the interest rate and longer the term, the more you'll need to discount the loan, yielding a lower loan constant. To reach their targeted return, investors might discount the loan further. Keep in mind, a higher loan constant translates to a higher loan value.

4. Yield/IRR Variations: With lower balance loans, yield/IRR can be misleading due to its potential for large variations. Always consider the absolute profit - a difference of $1,000 can significantly change the yield.

5. 0% Loans: Avoid these at all costs. If the seller defaults, they have no incentive to pay since there's no accrued interest. Moreover, any fees you advance won't collect interest. Your only exit strategy would be to wait until the property is sold or you manage to sell the loan.


  • Chris Seveney
business profile image
7e investments
5.0 stars
15 Reviews

Loading replies...