Not too long ago, real estate lending was largely controlled by financial institutions and hedge funds. The financial meltdown during the past decade changed all that, as banks and institutional investors attempted to mitigate loss from nonperforming notes by selling them, sometimes for pennies on the dollar, to private individual investors. Not long after that, holders of self-directed IRAs saw mortgage note investing as an excellent way to diversify an investment portfolio. Note investing is a viable business at which many can become successful. With due diligence, thoughtful sourcing and strategic dispositions, note investing is an intelligent source of income. Here’s why.
You are not the landlord. When you purchase real property for rental income, you are responsible for what I call the three T’s of being a landlord: tenants, toilets, and trash. Property ownership involves more than collecting a rent check every month, and there are a couple of downsides.
- Properties don’t always appreciate, and you may not have the luxury of holding onto your investment until you’ve made an acceptable return.
- Cash flow is not always stable. To make money, rent must exceed mortgage payments, taxes, insurance and repairs.
You are the lender. You own the note, not the property. The homeowner pays you, just as he or she would pay a bank.
- The homeowner must pay taxes, insurance and repairs.
- Your investment is secured by the property. If the homeowner defaults, you get the house back.
You also have the option to modify the loan to help the owner stay in the home. This works well when you have a motivated owner.
Note investing comes with fewer headaches and, most of the time, borrowers who keep making monthly payments. That’s why notes are an intelligent investment.
~ Jay Tenenbaum