So, you want to start investing in notes? Great! Investing in notes can open up the door to passive income with minimal monthly maintenance — if done correctly.
But, note investing should not be taken lightly. To set yourself up for success, you need to do your homework.
Luckily, you can learn from those that came before you. Here are a few note investing tips that can save you a lot of time (and hassle).
5 Note Investing Tips
1. Know The Types of Notes You Want
Not all notes are created equal. If a deal looks too good to be true, it just might be.
While there are real estate notes with large discounts and potentially high returns, more than likely they have something that is considered less than ideal. It could be that the note is non-performing, has a low-interest rate or is a high-risk note.
Before investing, be realistic with what you want. When you first start, “time intensive” notes may not be the ideal place to start. If you are looking for a passive income with minimal maintenance, stick to lower risk, performing notes.
2. Be Ready to Verify Everything
With every purchase comes the required due diligence. Never purchase anything sight unseen — especially mortgage notes.
What should you look out for? Here’s a partial list of key indicators:
- Do all the stated terms match the original written agreement?
- Does the home’s worth match what you have been told?
- Have all the payments been made on time through a verified servicing company or is there a history of late payments?
- Are real estate taxes and property insurance current?
- Is there a title report or policy showing clear ownership and lien status?
- Are collateral documents in order and enforceable?
Not only should you verify all the terms of the seller-financed note, but check the payer as well. Are they in the process of refinancing? Have they recently lost their job or maxed out their credit cards? All of these things can affect their ability to make timely payments.
3. Hope for the Best While Planning for the Worst
Success comes to those who work for it.
So, set yourself up for success and always have a back up plan…should things go wrong and the payor defaults.
The best way to do that is to always keep the Investment-to-Value (ITV) at a level that you feel comfortable with.
4. Think Outside of the Box
Don’t find yourself in a note rut!
There is no right or wrong way to purchase notes, note investing is all up to you — the investor. So, explore your options.
For example, look into partials. Especially when starting, partial note purchases can be your friend as they are often the safest and most profitable.
Just because a note has a low-interest rate, doesn’t mean you can’t make big returns. Smart and creative investors can take 3.5% face rate notes and yield double digits because they can think outside of the box by discounting the note or using a partial purchase.
5. Understand Note Investing Take Times
We always wonder where people hear that note investing is a get rich plan. Because, largely, it’s the exact opposite.
While notes generate passive income, receiving monthly payments on a note won’t start adding up until months or years down the road. It is the power of compounding interest over time that creates true wealth.
And sure, if the note stops paying you to get to take the property back. But, it doesn’t happen overnight, and it is not cheap. Foreclosures cost both time and money whether the note is seller-financed or bank-funded.
So, if you need money NOW, note investing is probably not for you. Be ready to be in it for the long haul.
Note Investing can be a great way to create passive income and generate higher returns backed by real estate while not requiring a 40-hour work-week or hassling with tenants, toilets and trash.
Have questions? Want to start investing? Contact Equity First Funding today!