Real estate note investing means buying the debt secured by a property rather than buying the property itself. Returns depend on the loan terms, the borrower’s payments, the collateral and the investor’s ability to handle defaults and legal costs.
Real estate note investing can produce income, but the investor takes on credit, collateral and legal risk. Myths about cheap notes and effortless returns can hide the work required to check the borrower, property and lien before purchase.
So, here we will debunk and demystify myths of note investing in the real estate sector. We will discuss the top 5 mythologies and folklores regarding note investing that needs to be elucidated!
Myth # 1: Note investing is way too risky
Reality: It is slightly risk-free with high control
The fact is that no investment in real estate is free of risk. But when it comes to note investing, the risk is manageable as you get a great deal of control over it. Even in case of fraud and loss, there still are backup chances of securing the remaining investment.
Myth # 2: Complicated and difficult process to comprehend
Reality: Less complicated than buying a home
Note investing is not difficult to understand at all. In fact, it is less complicated than purchasing a house. There is no dealing with lawyers, real estate agents, home inspectors, etc. The process is simple, where the seller will be signing the note for you. The best part is, there is no closing cost too.
Myth # 3: You need to break a bank to start note investing
Reality: A few thousand dollars are perfect to start with
To start with note investing, you can start by purchasing the seller-created real estate notes. These can be worth a few thousand dollars only. You can also broker the notes to the institutional investment firms without using your cash in note investing. Through this process, you can buy notes from the money you have generated.
Myth # 4: Overcharging and usury is common in note investing
Reality: The interest rate is never unreasonably high
The truth is that with note investing, you can easily make double even triple yields, but they are never usury. The interest rate and the payment will remain the same, at the rate the note was sold. It is the investor’s yield that comes from reduced prices that are paid for the note.
For instance, an investor has a note worth $10,000 with payments of $132.15 and an interest rate of 10% every month. If the investor is paying $10,000 for his note, he will yield 10%. But if he is paying $8,000, then the yield will be much higher, something in between 15.63%. Notes financier’s interest rate, and the payment is never going to change with no closing costs.
Myth # 5: If the note is not Performing, it will be sold for pennies!
Reality: The note is sold at the same rate it was purchased before
If you are talking about older days, then it was the truth! Junior lien under or not performing notes used to be sold for pennies. But now, the case is different! The notes are sold at the rate it was purchased. If you buy a not performing note in pennies, you will sell it in pennies again when you will sell it.
A note should be judged on its documents, payment history, lien position and recovery options. Investors also need to understand local servicing and foreclosure rules. No checklist removes the risk, but due diligence makes the assumptions visible before money changes hands.
Check the note before you invest
Review the payment history, lien position, property value, loan documents and servicing arrangements before committing money. Foreclosure rules and borrower protections differ by jurisdiction. This article explains common ideas and misconceptions; it does not replace financial or legal advice for a specific note.
