Thinking About Getting Into Notes...
I've been lurking around the forums and have bee thinking about various ways to get into real estate. Although I own a few properties, it was more about having a place and buying a house without selling the condo we were living in than it was about a conscious effort to invest in property.
My current concern is that I don't want to invest in property in the current market. High prices, interest rate pressure, and lack of time are primary reasons for this. I do pretty well with my day job, so I'm not looking to pound a lot of pavement. I'm considering buying notes. A couple of questions:
What are some good resources for getting to know notes? I'm pretty savvy financially WRT determining yields, etc., but I need to determine how this particular market works.
How does one protect him/herself against rising interest rates? Are adjustable rate notes common in the secondary note market? I would hate to be sitting on a 7% fixed note when rates rise (as I think that they will), thereby eroding what my note is worth should I decide to sell it.
Thanks in advance for any advice!
Everett
it all depends if you want to buy or fund your own notes.
fix or adjustable note can be had. Typically inthe "2ndary" mkt the interest rates are higher.
There are a couple HM/private lender that will do 65% LTV 9-11% loans and just use your or your's and other's moeny to fund them..
if you're buying notes you have to understand what you're buy and what if any discount you might get.
Plus, it takes alot of cash you don't mind coughing up.
Assume that most (all?) notes you will come across in the secondary market will have a fixed rate. Hence you are taking interest rate risks. As the interest rates on such notes are pretty high compared to day you will still be doing well if you hold. It will be if you sell.
Decide how long you expect to hold and if there are ways to speed things up. You can offer the borrower incentives to make advanced payment.
Generally you will find notes are not very liquid so expect to hold to maturity or take a bit of a hit when you sell.
Owning a note is not that different from owning the property in that you need to understand the property, its risks, etc. A better way to say this is the value of the security protecting your position in the note is important to understand.
From what you write I would say you largely understand the investment type and will just need to do your homework when looking at a specific deal.
John
[addsig]
Everett,
For what it's worth you seem to be a very risk conscience person which is good. Entering the notes world takes some learning which you will master in due time. I will come to you with a different approach only to offer something a bit more riskless but an excellant way to become familuar with the notes market and its nuiances. Become a facilitator or one who assist in the buying and selling of notes. In this position you put no money into the deal and have no risk exposure. This will enable you to participate in the real estate market like you want, you'll gain understanding of the steps it takes in negotiating notes on the secondary market and will provide a nice secondary income. Over time you can then start picking off the ones you want for yourself thus graduating from a facilitator to a note buyer/investor. The money you make can then be used as a source of funds to purchase those attractive notes. This is a conservative approach of course and only a suggestion. If you have more aggressive goals then be prepared for the risk and capital requirements.
I hope this helped,
Mark, CCFC
Guys,
Thanks. I would definitely be interested in facilitating the buying and selling of notes. It would probably be easier to break into the note business this way. The only drawback is that I want something that will be a hobby of sorts - one where I can both have fun and make money. It sounds strange to have such an approach, but I have a good 'day job' and prefer not to take energy from that to do notes if notes are only going to net me a few grand a month with a part time effort. I would think that being successful as a note broker would require a commitment that I'm not prepared to make.
-e-
depeds on the pool of money you have.
If you have 500K, and the avg. loan if 50K, then there's a lot of work.
If they loans are 250K you have 2 loans, You can farm out the servicing as well.
Watch out for usury laws and licensing laws.
E,
If you more or less already understand how to compute a loan payment, I can walk you through some of the details for pricing notes. It is really pretty easy.
If you are lacking in time I am not sure that you will want to facilitate vs. just hold a few notes. One is more time intensive in return for a fee while holding a good note is pretty much just cashing the checks after you buy the note.
All the normal risks of default.
John
[addsig]
John,
I'll drop you an email over the next week or so, as I would definitely be interested in any advice you might have. I've been a little out of the loop lately do to other commitments, but look forward to touching base with you. Thanks again!
Everett
One quick suggestion...
You need a financial calculator and you need to get really good at computing a mortgage. You want to work forward and back so that you can figure out both an existing note's terms and what the terms might be if you restructure the note.
John
[addsig]
I have an HP 17bII+. Now I just need to start pounding the keys. Is there any resource on the web that will show me how to do this, or should I check the bookstore?
-e-