We all need a higher rate of return than the banks are currently, what better way than Investing in Real Estate ad Business Notes. Here are some ideas that you can employ
1) Invest in yourself
2) Early mortgage payoff
3) Invest in a note
4) Buy from a broker
5) Buy a partial
1) Invest in Yourself
If you think education is expensive, try ignorance! There is no greater dividend that will ever be paid than your return on your investment in education: Provided it is the right education. What is right? It’s education that teaches you how to excel, make money, negotiate, be creative, take calculated risks and strive to get ahead. Education that teaches you how to work for someone else and put in just enough to get by is detrimental. Education from someone who has never left school and faced the real world should always be questioned.
2) Early Payoff on Mortgages
It's a simple mathematical conclusion that if you have money invested at 6% and are paying on a home or rental mortgage at 10%, it doesn't make sense. Yet in many cases, people don't see the scenario clearly. If you have any long-term money invested at less than your home or other mortgage, use the money to reduce the mortgage. What is a little more obscure is that you can make monthly contributions to paying off high-rate loans with a simple phone call to the lender. If you pay an extra $100 each month on a 10% amortized mortgage loan, the $100 goes directly towards principal and pays your home off years earlier. What is your risk? None! Debt reduction
is a guaranteed rate of return.
3) Invest in a note
Investing in discounted mortgages can offer safe rates above 10%. If you know how to do the simple paperwork or have a consultant or team of pros that can do the work for you, it can be a safe, simple process. If you don't have the skills or have an associate that does, contact me
for information on the National Note Franchise office in your area that can help you do the "due diligence" and put together a professional package on the mortgage for a reasonable
4) Buy from a broker
Many note buyers in the marketplace are brokers who buy a note at one price and sell at another. You may be able to achieve an attractive yield by buying from them or investing with them. Due to a few brokers out there being "ethically disoriented" you must use caution and review
their packages, data and representations carefully. There is a large distinction between investing in already existing mortgages with a discounted mortgage broker and originating new mortgages with a loan broker. The latter carries a greater degree of risk and greater need for verifying the documentation, supporting values and data.
5) Buy a partial
In cases where a note seller needs a small amount of cash, doesn't want to take a large discount or your investment funds are limited, the purchase of a "partial" can be a good option. Buying a partial involves the purchase of less than a full interest in a mortgage. For example, a $10,000 / 10% / 30 year note would have a payment of $87.76 per month. To purchase this note at a 20% yield would cost $5251.87. Buying a partial could be as simple as buying half of the note. Let's say we purchase the first 15 years of payments for $5,000. Our rate of return would be 19.99% on our investment. Partials can be a powerful tool. There are also strategies where you buy the latter portions of notes (Tails).
Here are 15 things to consider when selling with owner financing and creating seller finance notes.
1. You must have High Credit Score
2. Down payment at the time of closing must equal or exceed the present market equity in the property. This is because the amount of the payment will affect the actual value of the loan.
3. You must have a good payment history (past 12 months).
4. Your seasoning of the mortgage note is important. For instance, the more payments received since its origination will make the mortgage more valuable.
5. Certain geographical Location affects the value, makes it more or less saleable.
6. Appraisal value of the mortgage holder’s property.
7. Curb Appeal
8. Interest rates affects value. In general, the higher the rate the better.
9. Length of terms. Generally, if the person has lesser time to pay, they will receive more money in the sale.
10. Depending on the situation, balloon payments can affect the loan negatively. Which means, if the payer cannot meet the terms of the loan payment, it decrease its value instead of impacting it positively.
11. Good Record keeping. Person must keep good records of payments including deposits, cancelled checks of payments and the like.
12. Note amount. Typically, buyers are looking for an amount that ranges from $50,000 to $500,000.
13. Property Type. The type of property makes a significance difference. Buyers lean more toward single family and owner occupied dwellings.
14. Documentation Type. As new regulations take effect, the document type has become more important over time.
15. Seller must be willing to share relevant data with the seller. The value of the mortgage increases when the seller makes all relevant information readily available to the buyer so that they can make an informed decision (i.e. promissory note, payment records, settlement statements, old title policies, declaration page of home owners insurance, and anything else that can assist them with making a decision to buy).
With this being said, when you review this list, you may want to start by choosing at least 5 Factors That Can Make Your Mortgage Note More Valuable. By focusing on ensuring the first 5 factors meet these criterion, you can make sure that all 15 keys are strategically taken care of within a specified period of time
If you are going to sell a piece of property it is very important
1.a) Recommended Interest Rate for owner occupied 1-4 Unit Residential:
- 0-8.5% for a 720+ credit score
- 0-9.5% for a 600+ credit score
- 0-11% for below 600 credit score
Add 1% to the rates above for Commercial properties, 2nd homes and vacation properties
Add and additional 1% to all rates Non-owner occupied residential or Commercial properties.
1.b) Credit score of your buyer/borrower(s) should be over 600, preferably over 625. Don’t sell to Buyers with credit scores of under 600, unless you will keep the Note and are happy to deal with added risk of foreclosure due to default – which is a strong possibility. You might think the Bad Credit buyers are the only ones who need Seller Financing to buy a property. That isn’t the case. Self employed buyers, buyers with average credit above 600, and buyers with a number of real estate investments are often turned down at the bank. With Seller Financing, you can attract many Buyers who cannot get traditional lender or bank financing, e.g.:
- Self Employed Buyers
- Successful investors who own too many properties for the bank
- Fair, good, and high credit buyers that just had a divorce, bankruptcy, or a not so recent foreclosure that disqualifies them for a bank loan.
1.c) Include a 5/7/10 year Balloon due date on a 30 yr amortized loan. This makes the loan more valuable, because in the case of rising interest rates, the interest rate can be increased if the buyer does not refinance and payoff the balloon.
1.d) Always get a Cash down payment, zero down loans are heavily discounted on resale:
- 10% or greater for owner occupied, 20 % recommended
- 20% or greater for non-owner occupied, 25% recommended
- 30% or greater for commercial property or a sale of a business
1.e) You can and should sell at FULL market price for the property if you offer Seller Financing.
1.f) You may optionally charge, 1-4 percentage Points for the Seller Financing loan you are providing, and for creating the Note and mortgage documents. This is similar to a bank or lender, and it improves your total cash out from the sale.
1.e) If you do not get the recommended cash down payment, you can create and carry an additional 10% second mortgage loan that you do not sell. In the current tight RE market conditions, this improves the amount investors will pay you for the primary loan that we are purchasing and gives you better total cash out in the long run.
5 Resources to Educate Yourself on Real Estate Note Investing
As with any new venture or form of investing, it’s important to gain knowledge of what’s involved, so as to increase the likelihood of success. Well, note investing is really no different, and getting educated in this area is definitely not something you want to skip.
Remember, as I stated in previous articles, that if you want to be successful in something, you’ll need to get educated in the space, start to network with others doing the business, and if you really want to accelerate things, you should find a mentor or coach in the business.
Education is a big part of it. Although I discussed some resources in my recent article, “How to Get Started in Real Estate Notes: A Primer for Investor Newbies,” I’d like to expand on the sources of education that are available for learning the notes business.
5 Sources of Note Education
There are many books on the topic of note investing, but to know which ones to pick up, you may want to first decide what types of notes you’re thinking about investing in.
For me, one of the best books I read when starting out was Invest in Debt by Jimmy Napier, but this was geared more to the seller-financed note business. I started out doing seller financed second mortgage notes when selling a property and private money notes (very similar to a hard money lender), which are really short-term, first mortgage rehab loans.
The Banker’s Code by George Antone is broadened to wealth building strategies and being the bank, but it’s definitely a good read when you’re just starting to learn about note investing.
If you’re looking for something specific, such as information on mobile home notes, then you could check out Deals on Wheels by Lonnie Scruggs.
It’s important to get to know what your flavor is, such as first mortgages, second mortgages, commercial mortgages, private mortgages, distressed banknotes, etc., just to name a few.
Then there are blogs, and of course one of the best is BiggerPockets. There are plenty of note articles, and there is also a Tax Liens, Notes, Paper, & Cash Flows discussion forum that you can subscribe to or use to ask note related questions.
A lot of note event promoters have blogs on their websites too, where you can find free content about note investing, such as the The PaperSource blog.
There are also industry blogs, which are geared towards news and updates that impact the mortgage industry. A few examples are DS Mortgage News, National Mortgage News, Mortgage News Daily, or even HousingWire.
3. Podcasts and Webinars
BiggerPockets has a podcast on notes, as do some other venues, such as Brecht Palombo’s DistressedPro.com.
Besides some low or no-cost interviews and webinars that note experts in the business put on, many self-directed IRA companies (CamaPlan, QuestIRA, Equity Trust, etc.) also provide free webinars on note investing. And another perk is that they’re not selling you anything.
Keep in mind, some webinars may be a ploy to get you to go on to the next level with the speaker or promoter of the podcast or webinar, but a great way to screen that is to ask others on BiggerPockets for their opinions and past experience with the various speakers.
4. Mentors and Events
Finding a mentor and attending events may be a little more challenging, depending on the amount of time and money you have to invest in your note education.
To be quite honest, at most of the note events I’ve been to, I’ve met a lot of great people and learned a lot too, even if there was some guru selling going on. Usually, the events really weren’t super expensive either.
As with anything where common sense will have to prevail, there are good mentors and there are bad; sometimes you get what you pay for and sometimes you don’t. The best advice is to do your homework and research the person or programs.
For me, networking with other note investors has been the most helpful. As for new groups, these are usually online or in person.
For example, I run a Distressed Second Mortgages Group on LinkedIn (DSMG). In my area, you can join Philadelphia Note Investor Group (PING), where you can physically go to a meeting and network with like-minded individuals.
There are many note groups out there, many of which are organized through either Facebook, LinkedIn, or Meetup.
No note group near you? Do like Andrew McDaniels did with the National Note Buyers and Sellers group on Facebook, and start your own.
There are also national conferences focused on notes, such as PaperSource and Noteworthy. Then, there are conferences more specifically in reference to institutional notes and mortgage servicing, such as Five Star and Mortgage Bankers Association.
ACA International also holds Conferences & Expos, which cover compliance and other topics related to debt collections.
Now, finding a mentor can be a little tougher. There are mentors you can pay — after all, they’re giving up their time and it may be well worth it, or there’s no-cost or low-cost mentors. Maybe it’s someone who doesn’t sell coaching, but they happen to have a lot of experience in the business.
Hopefully you can bring something to the table to help them. Really, it needs to be a two-way street in this type of give-and-take situation in order for it to be fair. What can you do to help your mentor out? It doesn’t really matter what it is, but it should be a fair exchange.
5. Taking Action
When teaching about delinquent second mortgages over the years, we used to have a saying that our students were afraid of the “F” word — Foreclosure. Oftentimes, they were afraid of the unknown future outcome and expense of their note deal (especially since deal outcomes are more statistical with second mortgages), and they were often reluctant to move forward in the collections process.
Well, this is very similar to someone who’s learning about note investing for the first time, except that for them, the “F” word is really Fear, which can be a roadblock preventing them from taking future action.
Getting educated in the note space is important, but I also believe that it is a “learn by doing business.”
At some point, the student needs to pull the trigger and get into a note deal. Keep in mind, there are safer ways to do this when starting out, such as purchasing first liens or deals with a lot of equity.
If you’ve done your due diligence and your homework, maybe it’s time to move on.
After all, the best education I’ve gotten has usually cost me some money.
Please chime in to provide feedback on these resources or to recommend others!