Thinking about note investing but just don’t know where to start? Don’t worry, we got you covered.
Our CEO, Ted Tekippe, recently hosted an exclusive webinar alongside industry experts, Eddie Speed and Justin Bogard from Colonial Funding Group, to understand the basics of owner financing and what it takes to become a successful note investor. Here’s what we learned.
What is note investing?
Note investing is a type of real estate investment where the investor buys a promissory note from the original lender or current holder (as opposed to a physical property). The note represents the borrower’s obligation to repay the loan, typically secured by real estate, and the investor effectively becomes the lender and is responsible for collecting repayment from the borrower.
TL;DR: It’s a great way to generate passive income from real estate without the stress of managing a property.
Are you a good note or a bad note?
While there’s no magic formula for evaluating a note’s worth, you can get a pretty good sense from how it’s structured (i.e. buyer’s credit score, payment history, collateral type, etc,). Notes that are well-structured are more marketable and therefore more profitable.
Here are some other factors to consider to help secure your investment and maximize returns:
- Buyer Qualification & Creditworthiness
Buyer qualification criteria is an important risk mitigation strategies. For example, a substantial down payment indicates buyer commitment and reduces default risk. Other factors include:
- Buyer Creditworthiness: the higher the credit score, the lower the investment risk.
- Collateral Type: the quality and condition of the property securing the note matter.
- Payment History: a solid track record of on-time payments enhances a note’s attractiveness.
Be wary against acquiring notes backed by low-quality properties, as these often lead to higher default rates. And a clearly defined underwriting process, such as verifying borrower income and ensuring thorough documentation, will help you further minimize risk.
- Compliance and Regulatory Considerations
Another critical aspect of note investing is ensuring compliance with legal requirements, such as Dodd-Frank, which governs seller financing to protect buyers from predatory lending practices. Failure to comply with these laws can result in hefty fines, making it essential for investors to stay informed and work with legal experts when structuring deals.
- Creative Strategies in Note Investing
Beyond traditional buying and selling of notes, you can also engage in partial note sales, where investors sell a portion of future payments for immediate liquidity while retaining long-term income streams. This approach provides flexibility in capital management and tax advantages by structuring the sale as an asset transaction rather than an ordinary income event.
You can also utilize different loan structures, such as shorter amortization periods and balloon payments, to maximize the present value of future cash flows.
Conclusion: A Roadmap for Note Investors
Whether you are new to the industry or a seasoned investor, understanding the nuances of note investing can open doors to significant financial growth. By staying informed, leveraging strategic investment techniques, and adhering to legal best practices, you, too, can harness the power of notes to build long-lasting wealth.