Often times owning a note can give you low cost positioning into a deal. In a private note deal with a 1st mortgage, your maximum loan amount is typically about 65% of LTV (loan to value) meaning that the most you’re getting the house for if you were to take the property back through foreclosure, is 65 cents on the dollar.
Owning a second mortgage can create other opportunities. For instance, owning a 2nd mortgage that was purchased at a lower price point than a typical 1st lien may give you
the opportunity to buy out the 1st lien at a discount. Another profitable example when owning the 2nd lien is where you could just reinstate the 1st mortgage, foreclose, and take over the property (with a Sheriff’s Deed) “subject-to” the 1st mortgage and just continue to make payments on the 1st.
Volume and Control
It is much easier to rehab 200 notes than rehab 200 properties! You can manage your
note portfolio from your phone, and your computer! You never don’t even need to leave
A loan servicer is also much more cost efficient than a property manager. Servicers are
approximately $25 set up fee, and $15/month no matter how high the monthly mortgage
payment (whether it’s $300 or a $3000 payment) as opposed to a property manager
who wants 7% to 10% of gross rent. There’s little to no management once a note is re-
performing, especially with a servicer in place who sends late fee notices, 1098s to the
borrower, and they also do the accounting for both you and the borrower.
It’s rare to deal with maintenance, tenants, and contractors. There’s usually less
responsibility. As an example Wells Fargo doesn’t usually do plumbing repairs. You are
also dealing with considerably less vacancies because it’s a homeowner mentality
versus a tenant’s. A homeowner generally has more “sweat equity” or “emotional equity”
than a tenant does.
You can flip or wholesale a note, just like a house. You can refinance the borrower especially once there is a pay history or through credit repair. You can also sell a note whether it’s performing or non-performing. You can even “rehab the note” which is to take a non-performing note and make it re-performing. Did you know that you can even borrow against the Mortgage? Your re-performing note and mortgage is used as collateral for another private loan with an investor.