“I’d like to have payments from a mortgage note versus constant maintenance, insurance, and liability of dealing with renters.”
Why invest in non-performing notes?
Mortgage notes are a great option for investing in real estate that provides stability and a multitude of available options even when the market is at its lowest point. Interest rates might vary from time to time, but residential non-performing mortgage notes are not aligned or correlated with the stock market. This means that volatility and economic factors are not at play and do not affect the performance of a mortgage asset. Non-performing 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 usually bought from lenders at a much lower rate.
Non-performing notes are priced very aggressively because the bank has a liability on their balance sheet that is not only performing but has not yet gone through the foreclosure process to wash out the liens and other debts on the title that keep the property from re-structuring towards a performing asset again. Often, non-performing notes involve a lot of work and will have plenty of obstacles to overcome once purchased, but the bank realizes this and prices the asset very aggressively to sell.
What are the advantages of notes compare to other investments?
There are no depreciation advantages with notes from a tax perspective. But on the other hand 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.
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 perspective. The homeowner usually has more invested in the property like “pride of ownership” and “sweat equity”. 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.
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