Note Investing ( A whole new world)

[Yasmine Bisumber]

Hey everyone, I recently listened to Podcast 169 with @David Greene ( like 4 times) and now I am completely fascinated with the idea of Note investing and how you can use it to pay down your rental properties. He pretty much opened my eyes to this entirely new world within investing.  Is there anyone else who is finding success with investing in non-performing notes, how did you get started? Is this something you did with a partner? We still see quite a few banks owned homes pop up in my market so  for me that seems to be a good indicator that there may be some potential here for investing opportunities. 

@Brandon Turner can we get David back on to go in depth about Note Investing? 

[Dion DePaoli]

I haven't but skipped through the podcast.  Most of it sounded like he was just talking about rental property.  

That said, as Wayne mentions, the function of paying down any existing mortgage is simply a matter of having the money to do so.  Where ever that money may come from.  

There seems to be a fair amount of speculation around the matter of prepayment here.  First, let's understand that a loan may have restrictions on prepayment.  Some loans limit prepayment to no more than 20% per year.  Some loans have prepayment penalties.  Moral of the story, do not just assume what is talked about in this podcast can be applied universally nor should we assume it is actually prudent.

The effectiveness of the prepayment fluctuates depending on the loan, interest and remaining term.  Generally speaking adding $100 to your payment can shave 7 years off a 30 year loan.  Adding $200 does not shave off 14 years.  We get diminishing results as we increase the prepayment.  

Loans which are late term or closer to maturity will already have a higher principal allocation of the P&I payment which acts to accelerate the principal pay down as a function of the normal loan amortization schedule.  So coupling prepayments with late stage loans will increase effect of principal pay down.   Obviously, that gives late stage loans a leg up on new loans if we apply the same strategy.  

We are also missing an analysis as to what is actually a better use of funds. To use capital to purchase a loan to pay down the loan or in fact using the same capital to increase down payment and thus reduce the interest liability over time from the get go. (that is a pretty big elephant in the room really) Larger down payments can result in lower interest which also reduces interest liability over time. There is a point usually around 65% LTV where the rate is as low as it can go without buying the rate down. Speaking of buying the rate down, yea, that comparison is missing too.

What tends to happen in many things "notes" is it is new to the audience and thus spurs a fair amount of speculation.  New strategies are simply new to those who hear them for the first time.  They are not newly invented.  I always like to say, there is no magic in mortgages.  You will not find newly develop ideas, you will find old ideas told to you for the first time.  

The garbage notes Wayne is mentioning would be loans improperly evaluated by newbie note investors. For instance, the strategy here is to acquire a performing note not a non-performing note as an NPN would have additional capital demands. They do not yield cash flow. So for hopefully nobody ran out and tried to purchase an NPN to pay down another loan as that simply won't work out well.

Investing in loans takes time to really understand and get good.  There will be lots of failures alone the way.  There is no short cut.  The classes that get put on by these guru's are just a bunch of hyped junk talk to try and charge lots of money for little content.  My firm has worked with many students from those seminars and I can tell you I am far from impressed.  I actually feel sorry for many as they waste money they didn't have on an education they don't get.  

We have seen over the past couple years what I like to refer to as "a race to the bottom" due to some of this guru teaching.  More and more investors think they can get involved in note investing will smaller and smaller amounts of capital.  More and more investors lose on their investment and chalk it off to "learning experience".  It's like a wacky brain wash cult.  As usual, we are more than happy to take your money if you want to just write it off to learning experiences.  Heck, I will even get you a bumper sticker.  I digress.

None of this is to create a fear around note investing nor imply that newbies shouldn't learn to invest in notes.  Rather, take it slow.  Be aware you are surrounded by sharks with an agenda.  Consider the fact you are not getting the whole story.  In many cases, you are not even getting the right story.  I don't have a book you can read.  I don't have a video you can watch and poof all the sudden you are a skilled note investor.  It takes time and experience.   There is no short cut.  

The best thing about Bigger Pockets is you can come here and ask questions and while some agendas play in the background you the content can be vetted by those with much greater experience than you.  That levels the playing field as much as it will.  

Good luck.