Real Estate Notes – Part III
This is the last part in our series on investing in Notes. The full special report with even more information and Tracy’s best favorite strategy will be available next week! Check back.
From Real Estate Investing To Note Investing
Chances are, if you are like many investors that discover notes you may have enjoyed investing in real estate. In a good real estate market you get the benefit of any increase in value while collecting the monthly rent checks from a tenant covering the mortgage payment.
But there are downsides to owning real estate:
- The first is, “What if the value doesn’t increase or worse… goes down?” This is a problem fresh in the minds of many investors.
- The second is the challenge in finding properties that cash flow. Making sure the rent exceeds the expense of mortgage payments, taxes, insurance, and repairs can be difficult in some markets.
- The third is the constant calls from a renter needing something; Clogged toilet, roof leak, light switch not working, and the list goes on.
When you own a note, you are acting like the bank. You are the one receiving the payments. If something needs fixed the owner has to do it. And like the bank, you also have the right to take the house back in the event of non-payment. You can then sell the property for cash or take back another note.
As a real estate investor you are likely already knowledgeable in evaluating property value and market conditions. To make the situation even better, you can structure a transaction so you are not owed anywhere near the value of the property.
Note Investing Example
Let’s say a property sold for $120,000 and the buyer put down a $20,000 payment. The seller of the property carried back an owner-financed note in the amount of $100,000.00.
Let’s also assume they wrote the note at 10% interest with 360 payments of $877.57 per month.
You have an opportunity to buy the note after five years have gone by (it could be any number of years, just picking a round number for this example).
That means there are 300 payments remaining.
The “Present Value” or current balance owed on the note would be $96,574.32
If you wanted to earn 12% on your investment you would pay $83,322.39 for the note.
Your risk is managed by the security having a property value of $120,000. That means your investment to value is 69% or that there is $36,677.61 of “equity” in the property.
Here is the good news…
You are earning 12% on a non-traditional investment backed by something traditional – real estate. IF the payer does not make payments, you have the same rights the bank has. You can foreclose and take the property back. You can then resell, create another note, or sell for cash.
IF you had to take the property back, what is the likelihood that you can sell a property worth $120,000 for something more than $83,322.39? Pretty good!
Of course, this is a simple example and there are certainly some other variables, but you get the idea.
With notes, you have the security of an asset backed by real estate – without the headaches!
And you have choices…
Want to lower your risk even further? You don’t have to buy the whole note!
You may just choose to invest $50,000, $20,000, or even $10,000 in the transaction – getting the benefit of even more “equity” in the property.
Maybe you want to buy half the payment. Maybe you want to buy just the next five years of payments. The remaining payments can be purchased in a variety of ways …all dictated by you!
Many thanks to Tracy Z Rewey of NoteInvestor.com for putting this awesome information together for REIF. You can contact Tracy online at www.noteinvestor.com or by email at [email protected].