There are a lot of businesses out there selling training programs about Mortgage Notes for varying “fees”.
These strategies are often referred to as a “Cash Flow” business, meaning they promise large income generation from Mortgage Notes. One problem with this strategy is that by the time you have given them all your hard earned cash for their program, there can be little or no capital left for you to start making money.
A large proportion of these systems require that you locate people who want to sell their Mortgage Notes and then you need to find a buyer for them, and as usual, this is never as simple as it is made to sound. Having said that, “Mortgage Notes” can be a very effective way to earn very high interest returns, all you need to do is find the right product that is managed effectively by an experienced advisory or management firm.
Why waste all that money, time and effort on someone else’s “scheme” when you can use that same capital, time and effort to purchase your own “Mortgage Notes”. Unlike Tax Lien/Deed Certificates, you will usually require a larger starting pool of seed capital.
There are a great many advantages to buying “Mortgage Notes”. Firstly, the Mortgage Note market is almost unlimited in size and volume. What is a “Mortgage Note?” A “Mortgage Note” is a home loan or mortgage secured by property / real estate, either residential or commercial and also sometime land. How much is a “Mortgage Note?” That could be anything from $10,000 to $1 million or even tens of miliions of dollars.
Essentially when a home owner takes out a 30 year mortgage against their property with a lender, they owe the lender lets say $100,000. If that note is “performing, i.e. the home owner is paying regular monthly payments of capital and interest back to the lender, the lender may choose to sell the note after a period of time for a percentage of it’s value, for example:
The borrower is paying the lender $500 per month for 10 years ($60,000). The lender may then choose to sell the note on to someone who is investing in income generating products for 80% of it’s face value, so the note buyer pays the lender around $72,000 (80% of the $90,000 left to pay on the mortgage note). The original lender then walks away with a total gross revenue of $132,000 on their original loan of $100,000 and the new note buyer assumes the original lenders position and the home owner now pays his $500 per month to the new note owner who, if he keep the note for the duration of the loan, will gross $120,000 on their investment of $72,000.
This type of investment is ideal for pension funds or even retirees who prefer a steady income as opposed to capital growth from their investment portfolio.
What are the advantages of a “Mortgage Note” over a Tax Lien/Deed Certificate? Well, a “Mortage Note” allows you to collect interest on a monthly basis, this enables you to reuse the incoming funds to make further investment and thus achieve a more efficient use of investment capital. Tax Lien/Deed certificates are only paid when the Lien/Deed is redeemed, i.e. the underlying real estate securing the loan is sold on.
The most profitable but potentially most risky form of Mortgage Note investment is non-performing mortgage notes. this is where the property owner has defaulted on the loan and is no longer making payments. The original lender is likely to release these notes for very low capital outlay and in the current crisis, due to huge writedowns of bad debt, you can pick up notes for around $18 cents in the dollar ($18,000 for a $100,000 loan), as the new note owner you can then restructure the note i.e. arrange with the home-owner a lower payment plan until they are in a better position to pay the full amount, or even write off a portion of the debt for them to bring their mortgage back into a range of affordability. For example:
Original Mortgage Loan: $100,000
Original Home Owner Payment $600
Note Purchase Price: $20,000
Home Owner Can Afford to Repay: $350 per month
Write Down Loan Amount To: $55,000
Home Owners New Monthly Payment: $330 per month
Total To Be Repaid To Note Owner: $118,800
Total ROI over 30 Years: 660%
Annual ROI: 22%
When buying “Mortgage Notes,” there are a number of things you will need to remember before releasing your hard earned capital. Not all “Notes” are equal. Doing the right research is very important but done right, there are few if any better ways to build real wealth.
About the Author: David Garner is Managing Partner of David Garner Consulting and also hold a position with BRIC Group as a Senior Portfolio Manager. David advises a broad range of private investors, groups and industry professionals on a diverse selection of real estate related solutions, from land acquistion, portfolio management and fixed return investment vehicles. David is available for consultation and advice on email@example.com