Supplement your income with a new type of investing.
Tired of being on the “wrong” side of the note business? You’ve probably got a mortgage, a car loan, or student loans, but in those cases you’re on the borrowing side of the business. There’s another side to that equation, and you could cash in on it!
As a real estate investor, you already have some of the necessary skills and experience to be great at note investing. Here are some of the reasons you should consider supplementing your rental properties with note investing:
Real estate investing and note investing have many similarities.
You’ll be well-positioned to get into the note business!
You’re managing someone and collecting payments—If you’re a landlord, you are managing your tenants and collecting checks from them. If you’re a note investor, you’re managing your borrowers in much the same way. The skills required are very similar.
You’ll work with titles— Just like when buying any home or investment property, you’ll want to check for a clear title. You’ll need to review the final title policy and get an endorsement from the title company if it’s an existing note, and if it’s a new note, you will get a lender’s policy to make sure your note will record in the desired lien position.
You’ll need to pay attention to collateral amount vs. value—You’ll need to think about the collateral value of your note investment in exactly the same way you’d think about it if you were actually buying the property. (Remember, if the borrower fails to pay up, the property becomes your own!) You might want to have the collateral inspected, especially if you’re originating a new note. That way, you can make the inspection a condition of the note funding. If there’s equity in the note, it’s often a good technique to borrow money from an investor and actually use your note as collateral!
You’ll have to deal with insurance paperwork—You’ll need to be certain that your borrower has the right insurance for the collateral and that you’re listed as a Mortgagee on the insurance certificate. That way, you’ll get your insurance check just as you would if you truly owned the property.
You’ll have to know the local real estate market—Notes are affected by market values just like your normal real estate properties are, and your knowledge will come into play when buying, selling, collateralizing, and refinancing.
You’ll have to make escrow arrangements—If you are originating a new note you will definitely have to deal with escrow. If it’s an existing note, you may or may not have to.
You can flip notes— You can flip notes much like you flip houses. Keep the money flowing constantly instead of parking it on one place, and you can get fast profits. The more you flip, the more you can buy, and your note investing business will continue to grow!
You can rehab notes—You can take non-performing notes and make them re-performing, then let them bring in cash flow or sell them for a profit.
You can wholesale notes—Wholesaling a note is just like wholesaling a real estate property: the time frame is short and you don’t rehab it prior to selling. If you can build a strong buyer’s list this can be a good option.
You can refinance notes—You can go through the refinancing process to revise the payment schedule of a note just like you could with your own property loans, only you’ll be on the opposite end of the equation as a note investor.
You can have someone manage your notes for you—Just as you can hire a property manager to take care of your investment properties for you, you can outsource the tasks of note investing to a professional note servicing company!
Notes have some advantages over traditional methods of real estate investing.
More manageable— The borrower (aka, the person living on the property) is pretty much responsible for everything, just as if they owned the property. You don’t have to take care of maintenance and other responsibilities like you do when you’re the landlord of the property. An added bonus is that the borrower has more of an owner mentality. They are happy to take responsibility for issues and will keep the property well-maintained, unlike a tenant, who is unlikely to take pride in caring for a property because it’s not (and never will be) theirs.
Less competitive—there are generally a lot of landlords in any given area, making real estate investing a bit more of a competition, but the competition is usually much lower
More passive—You’re still investing in real estate, but there’s less work to do. You’re not Cash flow without a lot of headache? Sounds good to us!
You can sell a partial note— It’s pretty hard to sell a partial house, but it’s easy to sell a partial note! You can sell part of the loan to the investor. That way, you still own part of the loan and the investor is still safe because you still have an invested interest in the deal.
Unsurprisingly, there are also some disadvantages of note investing.
Risk of long and stressful foreclosure process—As a landlord, when you’re not paid, you have to go through the headache of evicting a tenant. This can be time-consuming and expensive. The note-investing equivalent of eviction is foreclosure, which is usually even more costly and annoying. Foreclosure is a stressful process that has scared off many a potential note investor! (The upside of this is that you do acquire the title to the property, which then allows you to do whatever you want with the property).
Tons of regulations—Depending on your area, there might be a lot of confusing compliance regulations that you’ll have to become familiar with and be careful to follow.
Not always as many tax benefits—In the majority of cases, you won’t get a tax break for depreciation.
Have you considered dabbling in note investing? Or do you have lots of experience you can share with us? Let us know in the comments!