“I’d rather have a mortgage payment than a rent check any day and not have the tenants, maintenance, contractors, townships, liability, etc.”
Whole mortgage notes is an alternative real estate investment opportunity that is plentifully available when the market is strong and wanes when the market is suffering.
Although they have some sensitivity to interest rates, residential whole mortgage notes are non-correlated with stocks or bonds and are therefore not affected by the performance of those two asset classes. Whole mortgage notes produce income from the underlying mortgages, and the investor also benefits from the “collateral gap” between the amount paid to purchase the note and its value when the note is paid off or refinanced, or if the home is sold. The mortgages are typically purchased from lenders at a discount.
How Note Buying Compares To Other Investments
The biggest differences are depreciation and appreciation. From a tax perspective, there are no depreciation advantages with notes. As for appreciation, the face of the note is the face of the note, but sometimes when purchased at a discount, there can be a “phantom appreciation” because note values directly correlate to property values. When real estate values go up the value of the notes go up. Another plus with purchasing a note is that you don’t need any credit, or have to “qualify” like you would have to do for a mortgage to purchase real property.
Many new note buyers are afraid of the “F” word, Foreclosure. If a tenant of a rental property doesn’t pay rent you have to take the tenant to court by filing for eviction. Not only do you lose rent, but you have to evict them, pay court costs, fix the property and re-rent the unit. Usually, without recourse since many tenants do not have assets. With a homeowner, if they miss any payments and there’s equity in the property, you can collect the missed payments, late fees, corporate advances and any attorney fees. By attaching these items onto the loan balance, per your loan documents, you will recover these fees at some point, as long as there’s enough equity. There’s also a significant difference between a homeowner’s mentality and a tenant’s mind set. The homeowner usually has more invested into the property like “pride of ownership” and “sweat equity”.
Some Other Benefits Through Investing With Notes
- Increase your IRA or retirement account returns by using these funds to invest in notes.
- Increase your cash flow from equity in real property.
- You can borrow against the equity in a property and invest in a note to increase your return from that same property.
- Increase your return on investment (ROI) on equity when selling real estate by offering terms. For example: “Holding Paper” or “Owner Financing”, Carrying a second mortgage, often allows the seller to achieve a higher selling price.
- Better financing and leverage when buying real estate through the use of Notes and Seller Financing. You can get a higher return (ROI) on a rental property if the seller assists the buyer with financing.
- Private Notes used for “Rehab Loans”, are usually more affordable than a “Hard Money” lender