How To Buy Mortgage Notes
Interested in double-digit returns secured by real estate but without the headaches of the 3 T’s (tenants, toilets, and trash)? Then it’s a good time to discover how to buy mortgage notes!
Why Real Estate Notes?
Let’s face it. Wandering down to your local bank and opening up a savings or money market account is just not going to pay off big.
Traditional thinking is to sock away your hard-earned money into a regular retirement account and hope your nest egg is big enough by the time you retire.
The fact of the matter is that the most people are going to come up way short when they punch their final time card. A recent survey revealed the average baby boomer is half a million dollars short with 74% saying the will rely heavily on Social Security. The result? More people are working over the age of 65 today than ever before. (Source USA Today on Retirement Living).
So what does this mean to you? Don’t be average!
Traditional investing will probably leave you short. You have specific goals for your retirement and chances are it is the ability to do things you want – without the worry of how to pay for it.
Today’s savvy investors know they need solid returns backed by secure assets they can control. This is one of big attractions to note buying.
But What About The Risk?
No question that there is risk with any kind of investment. Even traditional investing such as Real Estate, Gold, or a well-rated annuity has risks.
But people often confuse “risk” with “non-traditional” investing. In other words, just because you’re not putting money in a FDIC insured savings does not mean you can’t minimize the risk of an alternative asset – with an even bigger yield on your investment.
What if you could invest in something familiar, set your own return, AND determine your level of risk? It may sound too good to be true, but that is exactly some of the benefits of purchasing private mortgage notes.
It’s All In the Asset
Chances are, if you are like many investors that discover notes you may have enjoyed investing in real estate. In a good market you get the benefit of any increase in value while collecting the monthly rent checks from a tenant covering the mortgage payment.
But there are downsides to owning real estate:
- The first is “What if the value doesn’t increase or worse… goes down?” This is a problem fresh in the minds of many investors.
- The second is the challenge in finding properties that cash flow. Making sure the rent exceeds the expense of the mortgage payment, taxes, insurance, and repairs can be difficult in some markets.
- The third is the constant calls from a renter needing something; Clogged toilet, roof leak, light switch not working, and the list goes on.
When you own a note, you are acting like the bank. You are the one receiving the payments. If something needs fixed the owner has to do it. And like the bank, you also have the right to take the house back in the event of non-payment.
To make the situation even better, you can structure a transaction so you are not owed anywhere near the value of the property.
Note Investing Example
Let’s say a property sold for $120,000 and the buyer put down a $20,000 payment. The seller of the property carried back a note in the amount of
Let’s also assume they wrote the note at 10% interest. If so, the note would look like this…
360 payments of $877.57.
You have an opportunity to buy the note after five years have gone by (it could be any number of years, just picking a round number for this example).
That means there are 300 payments remaining.
The “Present Value” or current balance owed on the note would be $96,574.32
If you wanted to earn 12% on your investment you would pay $83,322.39 for the note.
How your risk is managed: The value of the property is $120,000
That means your investment to value is 69% or that there is $36,677.61 of “equity” in the property. (Read Calculating Notes for ITV and LTV for more details.)
Here is the good news…
You are earning 12% on a non traditional investment backed by something traditional – real estate. IF the payer does not make payments, you have the same rights the bank has. You can foreclose and take the property back. You can then resell, create another note, or sell for cash.
IF you had to take the property back, what is the likelihood that you can sell a property worth $120,000 for something more than $83,322.39? Pretty good!
Of course, this is a simple example and there are certainly some other variables, but you get the idea.
With notes, you have the benefits and security backed by real estate – without the headaches!
And you have choices…
Want to lower your risk even further? You don’t have to buy the whole note!
You may just choose to invest $50,000, $20,000, or even $10,000 in the transaction – getting the benefit of even more “equity” in the property.
Maybe you want to buy half the payment. Maybe you want to buy just the next five years of payments. The remaining payments can be purchased in a variety of ways …all dictated by you!
The Good News Just Got Better – Tax Deferred or Tax Free
Did you know that you could purchase notes in or out of a retirement account?
Maybe your goal is for retirement income. If so, you can purchase a note within a self-directed IRA! That way the monthly note payments and interest earned can stay in the retirement account tax deferred or even tax-free with a self-directed Roth IRA.
If you need money for income now, you can also buy notes outside of a retirement or broker for a referral fee.
So, How Do I Start Buying Notes?
Like any investment it pays to learn as much as you can and follow those that have already done it. It’s also a good idea to start by brokering a couple of notes to understand the underwriting and closing process used by other note buyers.
Reading articles here at NoteInvestor.com is a great start. We also have a free special report and newsletter just for brokers and investors. Simply enter your email to receive instant access.
We also provide great resources, documents, and manuals in the bookstore based on our real life experience in the note business since 1988.
Matter of fact our course, Finding Cash Flow Notes. is the number one online training of its kind. To learn more about the course, go here.
In addition, here are a few articles that can tell you a bit more about buying notes for investment.
How to Avoid Going Broke Buying Real Estate NotesSource: noteinvestor.com