This is a NOTE investing
What is NOTE investing
- You own a note, a lien, a recorded loan on a property, similar to a bank
- You do NOT have ownership on the property
- You note (loan) can be either in 1st or 2nd position
- 1st position typically means the main lender/bank – it refers to who gets paid first
- 2nd position typically means a secondary (an additional loan) – it refers to who gets paid second
Note Investing Benefits
Investing in real estate notes, also known as mortgage notes or real estate debt, can offer several benefits to investors. Here’s an outline of the advantages of investing in real estate notes:
- Passive Income: Real estate notes provide a consistent stream of passive income in the form of interest payments. Borrowers make regular monthly payments, which can provide a stable cash flow to the investor.
- Fixed Returns: The interest rate on a real estate note is typically fixed, providing predictability and security in terms of returns. This can be especially attractive when compared to the volatility of other investment options like stocks.
- Diversification: Investing in real estate notes allows for diversification within the real estate sector. It’s an alternative to traditional real estate investments like owning physical properties, providing a way to spread risk across multiple notes.
- Reduced Liability: Unlike owning physical real estate, investing in notes does not come with the same level of property management responsibilities or exposure to property-related risks, such as maintenance and vacancies.
- Collateralized Investment: Real estate notes are often secured by physical properties. In the event of a borrower default, the investor may have the option to foreclose on the property and recover their investment, making it a secured investment.
- Multiple Investment Options: Investors can choose from a variety of real estate notes, including first mortgages, second mortgages, commercial mortgages, and more. This flexibility allows for tailoring investments to specific risk tolerance and return expectations.
- Potential for High Yields: Depending on the terms of the note, investors may have the opportunity to earn higher interest rates than they would from traditional fixed-income investments like bonds or savings accounts.
- Portfolio Hedging: Real estate notes can serve as a hedge against inflation. As property values tend to rise over time, the collateral securing the note may increase in value, helping to protect the investor’s purchasing power.
- Simplicity and Accessibility: Investing in real estate notes can be relatively straightforward, and it doesn’t always require a substantial amount of capital. Additionally, there are platforms and marketplaces that make it easier for individual investors to participate in this market.
- Tax Benefits: Depending on your jurisdiction and the structure of your investments, there may be tax advantages associated with investing in real estate notes, such as deductions for mortgage interest paid.
- Liquidity: While real estate notes are less liquid than stocks or bonds, they are more liquid than owning physical real estate. Investors can buy and sell notes on the secondary market, providing a degree of liquidity.
It’s important to note that investing in real estate notes also carries risks, including the potential for borrower defaults, interest rate fluctuations, and property value changes. As with any investment, thorough due diligence and risk assessment are essential before committing capital to real estate notes. Consulting with financial professionals or experts in real estate note investing can also be valuable.
About This Note & Property – [code: N1023]
- Total note is $56,298, for 36 months, with a monthly interest only payment of $750 and a prepayment penalty of one year, recorded in 2nd position.
- Plan: after 36 months investor should be getting:
- $750*36=$27,000 (interest payments) +
- Original loan amount: $56,298
- TOTAL: $83,298
- $56,298 is based on:
- $30,297.89 Reinstatement of 1st loan position ($22,688.21 arrears + $7,609.68 expenses)
- $10,000.00 Personal Loan
- $16,000 in related fees
- Simply Do It opportunity fee:
- $1450 – paid to Simply Do It directly and separately once NOTE is processed.
- FEE IS WAVED FOR THIS TRANSACTION
- After the NOTE is processed:
- 1st lien position: $45,000
- 2nd lien position: $56,298
- Combined loan (total payoff): $101,000
- Property value and details:
- Estimated value: $185,000-$200,000
- Estimated rent (in case offered as a rental): $1600/mo
- LTV (loan to value): approx. 50%
- Current interest rate on the loan is 16% (1.3% per month). If the borrower defaults on the loan the rate changes to 4% a month.
- Note processing and deal stabling: including 1st loan reinstatement, 2nd loan recording
- Signing up with a loan servicer (~$50/month fee) to streamline the loan payments
- Plan A: collect loan payments and full loan amount n 36 months
- Plan B: if borrower wants to refinance or sell before 12 months are over a full year of mortgage payment is due ($750*12) – the prepayment penalty.
- Plan C: in case borrower defaults:
- Option 1: negotiate with borrower on resolution such as deed-in-lieu
- Option 2: pay the 1st loan balance and take ownership of the property with starting a foreclosure. And once owned sell, rent, flip . . .
- Option 3: start a foreclosure process (subject to 1st lien position)
Q: Can I use an entity (LLC)?
Q: Can I use my existing entity?
Q: What documents will I have?
A: Typically: promissory note & deed of trust
Q: Are the ongoing costs?
A: Typically a mortgage servicer (~$50 per month) and in case Simply Do It is involved $50-$100 per month.
This analysis spreadsheet is provided “As Is”. All the information is believed to be accurate (except for the small effects of some simplifying assumptions), but is not guaranteed, and depends on the values entered for the property. This analysis is intended for the purpose of illustrative projections. The information provided is not intended to replace or substitute for any legal, accounting, investment, real estate, tax, or other professional advice, consultation, or service. The author of this analysis spreadsheet is not responsible nor liable for any damages arising from the use of the tool.
- Updated On:
- August 20, 2023
- 2 Bedrooms
- 1 Bathrooms
- 1,260.00 ft2
- Year Built: 1955
- Principal and Interest
- Property Tax
- HOA fee