Truly Passive Cash Flow

Owning hard real estate can offer many great tax advantages (and still does), especially when including depreciation deductions that can offset positive cash flow. Unfortunately, though, a ton of work is required for managing and maintaining the property.

For the owner/landlord, this can include everything from dealing with tenants and their liability to maintenance and townships, as well as the ever-increasing property taxes. Even for those of us who own property “hands-free” (through turnkey investments or outsourced property management), we still may find that managing the managers can be work.

When a note is re-performing and being repaid by the original borrower, the holder of the note will receive payments every month with little-to-no work required in order to continue receiving these payments. This makes the investment entirely passive. And the great news is there are no toilets, tenants, or maintenance required to earn these payments!

Owning a Note Portfolio is Easier Than Owning a Property Portfolio 

A note portfolio (either performing or nonperforming) can be managed from the phone and computer without ever requiring leaving the house or office. This enables servicers to manage notes on properties all across the nation.

And in those rare instances when there are issues, in the note industry we have what are known as mortgage servicers and property preservation companies to handle them. Servicers handle accounting and payment management plus any issues that arise with the resident. Property preservation companies deal with any physical issues with the property.

Notes Are Profitable in Various Market Conditions 

Unlike with the volatility of the stock market, note prices in the marketplace are directly correlated with real estate values. So in an upmarket, when the economy is in full swing, there are fewer foreclosures, and home prices are high and climbing.
There is a smaller supply of delinquent notes available in banks’ portfolios, which enable the bank to gain a higher price for its notes — especially because all notes are more likely to be fully covered by equity.
Although investors may have a higher acquisition cost, they now can benefit from a quicker exit. When there’s a question of time vs. money, the adage “A fast nickel beats a slow dime” is proven true.
What’s better — a 50 percent return in four months or a 150 percent return in 12 months?
Conversely, in a down market, there are more delinquent assets available (along with more junk assets) and there is less equity in the marketplace.
Though it can take longer to exit with fewer buyers for an asset-backed by a property that may be dropping in value (or have little remaining value), it’s not all bad. This is a glass-half-full scenario when it comes to loss mitigation. A longer exit means a longer time to get a loan modification. This situation also creates more assets in the marketplace for less capital invested. For the same amount of money in an upmarket, a note investor could acquire a larger quantity of assets than they could in a down market.

Collateral

 Unlike owning stocks that offer no real collateral, real estate is one of the safest
investments since it’s actual physical property. Since a performing note is secured by real physical property, there are multiple means of protecting a note investment.
Owning a secured lien that is tied to the property, especially if the property has equity, involves little or moderate risk because a note owner has a right to foreclose on the property and to recoup some, or all, of the initial investment. The investor who owns the note has a claim on the property, just as the bank would if they were to own the note.
Unlike in an eviction, in default of a property with equity, the note owner could recover missed payments, late fees, attorney fees, and corporate advances in the future.
Even junior liens with no equity (or low equity) can still be viable investments because of the borrower usually has a vested interest in the property, and traditional equity may not always be the sole factor when it comes to remaining in the home.

Versatility

What many real estate investors may not know is that nearly all the forms of profitability
that property ownership offers can be found with note investing.

What You Can Do with a Note?

Not only can purchasing notes be a unique way to obtain property (especially when buying vacant first mortgages), notes can also be flipped, rehabbed, and borrowed against or leveraged like real estate.

Flipping or wholesaling a note

 Whether a note is performing or nonperforming, it can potentially be sold to an investor in any condition, at any time. Generally, a note is not required to be held for a certain
amount of time before it can be sold again.
For example, in an upmarket, someone could purchase a performing note and hold onto it for a few months as they collect payments. Later they could sell it for close to (if not the same amount) as the purchase price. More importantly, the note doesn’t need to be performing to be sold.

Recapitalize by selling what is known as a partial

This practice refers to selling a partial amount of payments to an investor for a designated term at a designated price. This option can be a great way to quickly recover a portion of the initial investment while maintaining ownership of the note. It is beneficial for the partial-note buyer as well because it requires a smaller amount of money to invest for a shorter period of time.

Rehabilitating a note 

It’s like rehabilitating a house, notes can be rehabbed or retouched by reworking the original note. If a borrower were to miss one or more payments because of an unforeseen circumstance, the note owner (or their servicer) has the ability to rework the terms of the loan to fit the borrower’s new needs. This allows the borrower to stay in the home while the investor maintains a steady stream of cash flow.

Borrowing against the note 

The most versatile strategy of all involves an investor’s best friend:
LEVERAGE. Since the note generates monthly income for the investor, it can be considered a cash-flowing asset. As an asset, this note can then be used as collateral for a loan with a private-money investor; this is known as a collateral assignment of note and mortgage.
Just as a motor vehicle is collateral for an auto loan, a performing note can be collateral for a private investor loan. In fact, the private-investor loan allows the investor to recapitalize in a tax-free manner.
Since this is a loan, the new private money creates an opportunity for a revenue stream that is exponential because the loan can be used to purchase more notes.

Common Challenges Real Estate Note Investors Face

Socially Conscious Investing 

Obviously everyone needs a place to live. Through rentals or flips, you can feel good about helping families find homes. With notes, investors can do something just as valuable – and that’s helping borrowers stay in their homes without incurring any additional debt that could cause further repercussions down the road. Unlike stocks, which are essentially a zero-sum game with investors playing either side of the
investment (always leaving one party at a loss), notes can actually be advantageous for the investor and for every party involved.

How Note Investing Can Be Beneficial

Borrowers benefit from working with note buyers to create a viable solution, whether it’s to stay in their property or move on, and/or buy time without incurring debt that can be detrimental to their financial life. Housing makes up a large percentage of the economy, and reforming distressed debt in that area is beneficial to the entire economic system. When a person is not paying their mortgage, they’re also not paying their taxes or insurance escrowed in their mortgage. By turning these delinquent mortgages into performing ones, note investors not only help an individual through their financial struggles, but they also help improve the community at large.
So with all these advantages, who wouldn’t want to add note investing to their portfolio? Of course, these benefits don’t necessarily mean note investing is always easy. But hey, neither is real estate. The most success comes from being diversified in multiple investment avenues, creating a synergy between asset classes — all in hopes to experience the advantages of as much as possible.
Do you want to invest but don’t want to deal with tenants, toilets, and termites? Do you want to make a long-lasting passive income stream—from paper?

If you answered YES to any of these questions, please
contact The Note Agency today!