Why Note Investing is the new Fix N Flip
Like most people I started out in RE. I was buying SFH's and renting them out. It was a great business. I bought most of the homes in 2010 and 2011 in nice areas in AZ and FL. They rented fast and were a nice sideline to my day job. Then the problems started!
After about 40 units I found it very tough to run it as a sideline (even with managers in place). Weekends disappeared under a pile of paperwork. It became a drag. Then, as values improved my initial 10% - 12% cap rates fell to 9% then 8%....rents were not keeping up with capital values.
So I started buying in PA...lured by low prices and high S8 rents. Well, 10 of those babies will truly break your heart! High cap rates, even higher stress rates!! There was always something going wrong. Usually there were many things going wrong.
About 3 years ago, we started buying notes. The downside: there is a ton to learn...its 5x more complicated than flipping or buy and hold (especially if you opt for second liens and non-performing loans). The learning curve is steep and took about a year of hard work as I sold off the SFH and other RE investments.
The upside: it is much more scalable and produces much higher returns if you work them hard.
I'm delighted that I'm down to just a few RE holdings now and we have purchased 10x the number of notes in half the time it took to buy the SFH's. Notes are the future for me. It's not entirely passive - but I think its the best option. Long term cashflow backed by a hard asset at very low LTV with almost no borrower contact. What's not to like?
Comments (4)
Hi @Das Siva
You are right, just like REO and Short Sales, the discount on NPL's was much bigger a few years ago. Back in 2009, you could buy a non-performing first lien on a $300,000 home in CA for 25% of asset value. You were guaranteed to make money (or as close to a guarantee as you can get!) The problem was financing since RE was viewed as toxic at that time. Now its easier to raise investor financing but the notes are much more expensive. That same 25% note from 2009 is trading at 60%+ of value.
We buy in bulk from the banks, mortgage servicers and some hedge funds that sell from time to time. Sourcing is almost a full-time job. Its not easy but once you get your systems set up, its a great business. The key is to become expert in what you are doing slowly and carefully. Start with a few notes and go from there. I would anticipate spending a year learning the business with your first few notes before you are ready to take on more.
Paul Birkett, almost 9 years ago
Interesting post. Where are you currently finding your notes? I've noticed the discount on notes isn't what it used to be going back a few years
Dash Siva, almost 9 years ago
Great post @Paul Birkett several years ago i bought a lot of notes in one particular year. i enjoyed that business. I like this strategy as it offers an investor another tool for their tool box of investing and is an avenue most investors are not pursuing. Well written piece. Thank you.
Sky Mikesell, almost 9 years ago
Great post, @Paul Birkett! I'm just now learning about this note business. It's great to hear from someone that has made it work and isn't trying to sell me a course.
Carey Dodson, almost 9 years ago