What is Better? Out-of-State Rentals or Notes?

 “Invest in out-of-state rental property to become financially free.”

 Have you heard that pitch before?

There are many companies that promote this strategy to real estate investment clubs across the country. But have you taken a moment to see what they are REALLY promoting?

Let’s contrast this common strategy with “being the bank” as a note buyer in todays’ market.

Here are 10 questions to uncover the contrast between owning out of state rentals and  “being the bank” by owning the note:

1)    Who is really benefitting from you paying cash for a rental property? If the seller also runs a property management company, are they really feeding their own need for the cash flow rich business of property management? Doubt this? Ask any property manager about how they enjoy the cash flow. They will always smile first.
2)    Do you know how much the seller actually paid for the property? Chances are they are making a killing by buying at steep discounts and then selling to you at a generous profit.
3)    Do you really want to own rentals out of state? Remember the old Willie Nelson refrain, “You are always on my mind.” Just because it is out of sight, does not mean it is out of mind. In fact, ask anyone who has had tenant or maintenance issues with their rentals and you will see that investing in OOS rentals is not the ticket to hassle-free wealth building.
4)    How many rentals do you need to have in your portfolio if you get $200 for each monthly? If you want to receive $10,000 per month, that is 50 rentals. Now that Willie Nelson song is really starting to get obnoxious.  
5)    How much liability are you risking with many rentals in an increasingly litigious society? One lawsuit can make a serious dent in your wealth vehicle. Make sure you carry an Umbrella Policy. Note holders do not fret about such matters. Owning the note has historically been shielded from property ownership liability
6)    One advantage people always mention about owning rentals is the ability to ride appreciation up and then sell years later when the money is needed or depreciation has puttered out. Instead, we act as lenders and share appreciation with investors who manage the rental property for us. We do this by creating a seller financed note and then we get 50% of the appreciation when the rental is sold. Look for our future article on creating seller financed REOs.
7)    Another reason people say they like rentals is that tenants pay off the mortgage. Instead, we like to create mortgages with investor buyers who pay us each month to own the house.
8)    Many investors are so obsessed with owning rentals that they are paying outlandish prices today on the hopes of future appreciation. Yet if one pays too much for a rental, it becomes not so much of an investment as an alligator you have to feed every month, taking a bite out of your cash flow. Instead, we invest in discounted mortgages that convert to REOs at relatively low price points that are truly wholesale prices rather than speculating on future appreciation to cover present over paying.
9)    A landlord hopes that tenants will take care of his asset. Instead, as lenders we modify loans that we buy and have the vested-interest oriented homeowner take care of their own asset. There is nothing quite like leveraging the “ownership interest” by owning the note. In short, we shift maintenance of our assets to someone else while enjoying a virtually hassle-free investment.
10)    If a renter does not pay the rent, the landlord has to evict. Instead, if the homeowner does not pay, we have the power of foreclosure. Most often, homeowners do not want the hassle and give up the deed. Only 20% will resist the recovery of the asset. While neither scenario is pleasant, foreclosure has more teeth when it is needed. 

These 10 contrasts between owning rentals and owning notes serve as convincing reasons for owning notes. While we ourselves also benefit from holding rentals, we do so as the result of buying notes at deep discounts and then converting them into rental property. We believe that controlling costs is one of the best ways to control ones risk.  

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Brian Netzel has been a real estate and note investor since 1982 when he bought his first rental property on his public school teacher salary. He has been a landlord numerous times, flipped houses, and is now actively buying notes in the current market.  He is the acquisition manager for the private equity firm Inspired Capital Partners and the founder of SmartMoneyVision.com and RealEstateNoteInvestor.com which train investors to apply smart strategies that work in today’s real estate market.