Why Investing in Notes Can be for Income, Capital Gains and Wealth Building

[Don Konipol]

For the following information I give full credit to Jimmy Napier, the most creative real estate mind I ever met. His book “Invest in Debt” written over 45 years ago is the standard for understanding real estate note investing. 

Most investors I come across think note investing is restricted to INCOME, and are totally unaware that notes can be used for capital gains and wealth building. We are all familiar with buying or originating a note and collecting the interest until the notes pays off. But Jimmy Napier suggested ways to radically increase ROI; his suggestion specified "working the note". An example of this was buying a note at a significant discount, and then offering to half the interest rate if the borrower agreed to double the payments. Depending on the size of the discount when the note was purchased, this often resulted in a 5- - 100% increase in ROI.

I’m not big on providing THEORETICAL information, so I’ll list the methods I’ve personally used to obtain capital appreciation and wealth building from buying notes, in addition to just collecting the interest. 

1. Sold property with “wrap around” financing so that on the underlying note I was paying 4% interest and collecting 10% on the new note. On the $620,000 underlying note we were earning $37,000 annual income.

2. Purchased a note with a $3.2 million balance for $1.775 million.  Rewrote the terms with the in default borrower, offering g him a discount to $2.7 million if he paid us off within 2 years.  Not only did we collect interest on the full $3.2 million for 19 months, we received the $2.7 million payoff.  So in 19 months we made a $925,000 capital gain and collected over $400,000 in. Interest.  Bottom line was a $1,325,000 profit on a $1.775,000 investment in little more than a year and a half.  

3. Originated a note for $1,100,000.  After 12 months borrower defaulted.  He decided to “walk away” from his investment and executed a deed in lieu of foreclosure.  Within 2 months we sold the property for $1,415,000.

4. Purchased a first lien note with a principal balance of $400,000 for $350,000, and a second lien note with a principal balance of $250,000 for $50,000.  Immediately offered the borrower a discount on the first note to $350,000 and the second note to $200,000 if he paid both within 60 days.  He did, and in 3 months we received $550,000 on a $400,000 investment.

5. Originated a note with 5 different properties as collateral.  After a few months the borrower came to us to ask us if we would be willing to do a partial release as he had a couple of the properties sold at a good profit.  We calculated the collateral value of each property, and told him we would be willing to do a release based on (1) a payoff of our estimate of that properties collateral value PLUS (2) a extra fee (profit) to us of $50,000.  After much hemming, hawing, name calling, finger pointing, threatening, etc. the borrower agreed to our terms.  Result was an “extra” $150,000 return on our one year note investment. 

Please let us know situations you’ve been in where you where able to utilize note investments for gains greater than the stated interest.