Property or Paper - Which is the best return for you?

[Darren Eady]

12% - 18% returns are available to me constantly through performing mortgage notes and cash-flow rental property.  I like holding notes at 12%, but I don't like just consistency without an larger upside.  I enjoy rental properties at around an 18% return, but I don't love the maintenance or management expenses.  I do however like the thought of each property appreciating and potentially doubling my return.

Do you do both property and paper like me?  Which do you like more?

[Wayne Snell]

Hi Darren, like you we own both cash flowing rentals, cash flowing re-performing notes, and cash-flowing performers. We are seeing between 10-18% as well. We have property management to deal with the tenants and maintenance, but it does eat into the profits slightly. On the other hand, it certainly eliminates a lot of headaches. But I tend to prefer non-performing notes over buy and hold rentals for the following reasons:

1) We typically are able to get nearly 20% of the non-performing borrowers to re-perform on their loan at the existing terms. This is usually because their finances have improved. If that happens, it is fairly quickly (usually 3 months) so the returns are greater than 20% when annualized.

2) We get another 30% of the non-performing borrowers to re-perform at "new" terms through a trial loan mod or forbearance. We use our licensed attorneys and servicer to handle the transaction so that we remain compliant with regulatory issues. We collect payments and season the re-performing loan for 9-12 months and then sell it. These generally earn greater than 20% returns annualized

3) If we have to foreclose, then we do minor rehab work and attempt to sell it for cash. If it doesn't sell within 30 days, then we offer it as a land contract for a fair price. We then sell that loan after 9 months of seasoning. The yields on that are generally around 12-15%

4) If all of the above fails, then we rent the property and after 3 months sell it as a turnkey rental property. We create a note for the investor and the cashflow pays their note. Usually 12-18% too.

Of course as always, it "depends," and past performance is no guarantee of the future. And this does not constitute legal advice.  :)