Those new to note investing can sometimes find it a bit overwhelming. What makes a note a good investment? What if the investments don’t all pan out? If the payor stops paying, what happens next?
Note investing, and some risk go hand and hand, as do all investment opportunities. There is no “one size fits all” when it comes to purchasing notes because everyone’s comfort levels are different — and all notes are different.
When it comes to your risk level, it’s about what YOU are comfortable with. Here are a few tips to help you determine your comfort levels in note investing.
Note Investing and Risk: How to Find Your Comfort Level
While you cannot change the terms of the note, you can determine what you want out of your note investments. What do you want to accomplish? What terms are you comfortable with? Are you more concerned about an aggressive return on your money or will you sacrifice some returns for safer deals?
For those new to note investing and wanting a lower risk scenario, look for performing notes.
Performing means that the payor has made on-time, regular payments in the past. Non-performing indicates there is a history of missed payments, and the note may even be in default.
For those looking to reduce their note investing risk, look for notes with good payment histories.
When it comes to note investing and risk, one way to reduce your exposure as an investor is to find notes where the payor is invested in the property.
But, aren’t all payors invested if they have been making the monthly payments on time?
It’s true. Payment history shows a commitment but equity is another key indicator. The more equity a payor has, the less likely they are to walk away from the property. So to reduce your risk, find notes where the payor has a lower loan-to-value percentage.
Partial Note Investments
Worried about biting off more than you can chew? Don’t feel like jumping all the way in; you’d rather just dip a toe in the water?
One way to achieve that is through partial note purchases.
Instead of purchasing the entire note and all the remaining payments, you can purchase just a few of them. Perhaps you want the next five years of payments versus the full 25 or 30 year term. It helps lower your risk and exposure while also giving you monthly income.
Staying Within Your Means
Set a budget and stick to it.
Especially when starting, you may not be going after the most expensive notes.
And that’s fine. If you buy notes outside of your budget, you are also opening yourself to more risk or challenges than you are comfortable with. Instead, focus on great notes within your budgets, slowly expanding towards the bigger fish.
Note investing, and risk go hand-in-hand. It’s just the name of the game. You can never 100% predict what any payor will do or how their circumstances will change.
But, that doesn’t mean you can’t participate. Looking for real estate notes within your comfort zone will help you be successful in the note investing industry.