When was first asked to speak about purchasing nonperforming loans at a national conference, people couldn’t wrap their heads around the concept of buying the mortgage on a property instead of owning the property itself. I was even laughed at by some of the real estate groups who were certain that I had lost my marbles. Fast forward a few years and no one is laughing now. As a matter of fact, many of the larger real estate funds have turned to note buying to provide them with a strong return.
There are numerous reasons where owning a note is preferable to owing real estate. Here are but eight reasons why…
- No Calls at 3AM to Fix a Toilet: Very few things in the life of a landlord are as annoying as receiving call after call at all hours to repair an air conditioner. It’s a fact of life that if you own rental property, you’re going to have to maintain it. Tenants certainly don’t take care of their rentals as they would if they owned the property. Unfortunately, you have to pay for it. If you own a note, however, the borrower has to deal with those issues. Provided the borrower is paying their loan as agreed, you probably won’t have to step in to deal with those midnight calls to fix a toilet.
- Maintenance Costs: If you own a rental property, it is you responsibility to make repairs. Not so if you own the note. As a landlord, it can be very difficult and costly to guess how much you should put aside for repairs and maintenance. You don’t have to do that with a note. That’s on the borrower as they, not you, the homeowner.
- Finding Tenants: Finding and screening tenants is a nightmare. Stepford tenants are akin to unicorns. You never seem to find them. Finding a tenant that will take care of the property, pay on time, and regularly renew their lease is very difficult. With notes, however, you are typically buying the note at a discount, which means that if the borrower pays off the note early, you actually will end up with a windfall. If they pay you on time, you simply sit back and collect the interest. If they don’t pay you, you can foreclose and get your money that way. Note save you from the hassle of finding good tenants to full your vacancies.
- No Dealing with Property Managers: Sure, you can decide to self-manage your properties, but that means that you have to handle the repairs, find the tenant, and do all of those things that we previously talked about. If you hire a manager, it’s hard to know if they are doing a great job managing your property. With notes, however, you don’t need a manager. The borrower as the property owner takes care of all of the things you need a manager for.
- Passive: There is nothing passive about owning rental property. There is always something that requires your attention if you own multiple units. Owning a note, however, means that you can head off to the Bahamas when you want to. It truly is a very passive investment.
- Easily Sold: When you sell a rental property, you have to paint it, tidy it up, hire an agent, show the property, and do all of the things that you have to do in order to market the home to potential buyers. Not so with a note. There is a ready market of buyers clamoring to buy more notes. A note is easy and quick to sell. You simply need to agree upon a price, sign the contract, have the buyer wire you the money, and prepare and alonge and an assignment. It’s really that simple.
- Can Benefit Those in Need: Until now, we’ve talked about how buying notes can benefit you, but owning notes also means that you can make a positive impact on peoples’ lives. Servicers and Banks are often unwilling or unable to assist borrower that might have hit a rough patch in their lives. As the lender, you are in the unique position to work with them to help solve perhaps the biggest concern a struggling borrower has…how to I pay the mortgage. By purchasing a note at a discount, you are positioned to be able to alter the borrower’s payment, skip payments, or even allow them to sign the property over to you rather than face foreclosure. You are able to be a hero to families in need.
- No Vacancy Issues: When you own a rental property, keeping good tenants in the homes seems to always be a struggle. When you own a note, the borrower is legally obligated to pay you regardless of whether or not they are living in the home.
Of course, there are many reasons why owning notes is amazing in comparison to owning real estate. These are only eight of the reasons. If you want to learn more about owning notes, reach out to us directly through the contact section of our website. We would be happy to help.