Eight Proven Techniques: Real Estate Notes

Last episode we took a look at how to invest in REITs, real estate mutual funds and ETFs as part of the series of eight proven techniques for investing in real estate.  This week we are going to look at a technique that is still very passive from the management side but a little more complicated.  That techinique is: Investing in Real Estate Notes.  




Definitions:
Promissory Note: A signed document that contains a legally enforceable promise to pay a stated sum to a specified person at a specified time.

• Secured Note: A note that has a tangible asset tied to the loan that is used as collateral
• Unsecured Note: A note that is not backed by collateral but by the promise to repay the loan

Mortgage: A document that collateralizes the lender by stating that the lender can take possession of the collateral (home in this case) if the borrower doesn't meet the terms of the promissory note.

• Performing Note: A note where the borrower has been paying on time and is up to date on payments.
• Non-performing Note: A note where the borrower is more than 90 days past due.

How it works: This chart shows the simple basics of how a note investing transaction would occur:

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​How to invest:
There are five primary sources for purchasing notes:

1. Private Note Holders - i.e. seller financed property sales
2. Hedge or Private Equity Funds - buy in bulk from banks and servicers and then resell
3. Note Exchanges and Marketplaces (i.e. Crexi.com or  NoteTraderExchange.com )
4. Special Servicers
5. Banks and Credit Unions

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Pros:

• Mostly passive (no management)
  • No maintenance, repairs, etc.
  • No tenants, insurance, etc.
• Secured by real property
• Long term cash flows
• Competitive returns
• Can be purchased at a discount

Cons:

• Risk of default / foreclosure
• Capital requirements
• Lower liquidity
• No depreciation tax benefit
• Limited appreciation in value
• Fees for trading on short term basis

Where to get more information:
Bigger Pockets Blog
Udemy.com

Next week we explore how you can become the bank through the lucrative technique of Private Lending.  Please reach out to me with any questions or comments using the comments button or through the contact page on my web site.  If you would like to talk more about any of these investment methods or discuss how we can partner together, please contact me.