Author Topic: Have you invested in notes? Interested in learning more.  (Read 1207 times)

Captain Cactus

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Have you invested in notes? Interested in learning more.
« on: January 10, 2018, 07:44:59 AM »
After listening to a Bigger Pockets podcast recently I'm interested in learning more about investing in notes, specifically performing 1st or 2nd position real estate notes. 

Do you have any experience doing this?  Before investing did you consult an attorney and accountant? Do you recommend any resources?

On the surface it sounds pretty good.  Recognize there is inherent risk (death, divorce, job loss, illness).

VoteCthulu

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Re: Have you invested in notes? Interested in learning more.
« Reply #1 on: January 10, 2018, 02:25:52 PM »
I don't have any direct experience, but since you're not getting any other bites so far I'll put in my $0.02.

The returns are pretty good, but dealing with foreclosures is an absolute pain in the ass. I sleep better knowing I can take my money out of my investments at any time, so I don't have much real estate outside of my home anymore.

Captain Cactus

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Re: Have you invested in notes? Interested in learning more.
« Reply #2 on: January 10, 2018, 07:02:56 PM »
Thank you!  Sometimes I feel like the Bigger Pockets podcasts are hyped up advertisements for some guru's service, even though they try not to paint it like that.  I listening to a few of their podcasts where they discuss note investing, and while the idea sounds great I don't see any practical way for the would-be note investor to find a note.  Accredited Investors are another story, but for the aspiring millionaire, nothing obvious.  To be fair I haven't dug too deep yet, but now I've got some healthy skepticism. 

MaikoTsumi

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Re: Have you invested in notes? Interested in learning more.
« Reply #3 on: January 11, 2018, 09:12:13 AM »
Thank you!  Sometimes I feel like the Bigger Pockets podcasts are hyped up advertisements for some guru's service, even though they try not to paint it like that.  I listening to a few of their podcasts where they discuss note investing, and while the idea sounds great I don't see any practical way for the would-be note investor to find a note.  Accredited Investors are another story, but for the aspiring millionaire, nothing obvious.  To be fair I haven't dug too deep yet, but now I've got some healthy skepticism.

The notes guru at Bigger Pockets, Bwald Guy Jeff Brown, IMHO is one of the slimiest hucksters on there.  In their podcasts, they're always anti-guru but they regular have this guy on and promote his blog posts. None of his podcasts or posts are said with straight, up front language.  It's all magic thinking, rambling, and circular logic. He makes up his examples out of thin air and never provides real advice. You can listen to him and come away with no knowledge about notes.

L.A.S.

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Re: Have you invested in notes? Interested in learning more.
« Reply #4 on: January 13, 2018, 07:13:38 PM »
Aren't most mortgage notes that have been originated in the last several decades securitized and packaged into mortgage backed securities.  Can't someone just buy mutual fund or ETF that invests in Ginnie Maes and have exposure to a diversified pool of thousands of mortgages?

I'm sure if someone wants to own individual notes, there are a few cats and dogs out there such as seller-owned notes (seller financing/private mortgages apparently used to be quite popular), or banks that get stuck with a note because it turns out that there was an underwriting snafu and it is  non-conforming, so it can't be securitized and has to stay on their books.  Perhaps offers could be made to purchase these..  But, unless someone has really deep pockets there is no diversification.  Wouldn't this be really risky?

Michael in ABQ

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Re: Have you invested in notes? Interested in learning more.
« Reply #5 on: January 17, 2018, 06:48:57 PM »
I found this website a few years ago: http://www.notemarketplace.com/ pretty thin volume but reasonably transparent.

The problem is finding a note that has a decent return and then a. won't be paid off two months later when the borrower refinances with a traditional mortgage, or b. leaves you having to foreclose on a property that may barely be worth what you bought the note for.

I'm a commercial real estate appraiser and performing cash equivalency calculations (cash value of a mortgage note if made at above- or below-market terms) is something that gets beat to death in some of the required tests. I routinely see smaller industrial properties ($100,000 - $500,000) sell on real estate contracts to owner/users. Usually the interest rates are about 2% higher than a typical mortgage so nothing crazy. I did talk to an investor once who was able to purchase a note at a very steep discount when the seller was desperate and needed cash immediately. I forget the exact details but it was something like an $80,000 note for $30,000. The key was this investor had $30,000 in cash he could access that day and he was known in the small community as someone who would buy real estate notes. That's obviously very atypical and most of the time a seller would probably only be willing to discount the note by maybe 10% so they could get their money out to make another deal.
« Last Edit: January 17, 2018, 06:52:26 PM by Michael in ABQ »
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HAPPYINAZ

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Re: Have you invested in notes? Interested in learning more.
« Reply #6 on: January 25, 2018, 10:11:45 PM »
What about a site like Peer Street?  I have been investing in real estate loans with them for last year or so.  The site seems well managed and provides decent returns.

VoteCthulu

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Re: Have you invested in notes? Interested in learning more.
« Reply #7 on: January 26, 2018, 04:12:22 PM »
What about a site like Peer Street?  I have been investing in real estate loans with them for last year or so.  The site seems well managed and provides decent returns.
The main negative is that it requires you to be an accredited investor (1 million in assets excluding primary residence).

Has MMM given any updates on his experiences since his first post? I didn't see any but I may have missed it.

Bourbon

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Re: Have you invested in notes? Interested in learning more.
« Reply #8 on: January 26, 2018, 04:57:38 PM »
What about a site like Peer Street?  I have been investing in real estate loans with them for last year or so.  The site seems well managed and provides decent returns.
The main negative is that it requires you to be an accredited investor (1 million in assets excluding primary residence).

Has MMM given any updates on his experiences since his first post? I didn't see any but I may have missed it.

I'm on there as well, and qualify but I'm not sure what the verification process is.  It was a box check.  But yea, accredited investors only, by assets or income.

Another Reader

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Re: Have you invested in notes? Interested in learning more.
« Reply #9 on: January 26, 2018, 05:10:47 PM »
Bigger Pockets is full of storytelling, hand waving hucksters looking to make a buck off the unsuspecting wannabe investor.  The fundamental rule is if it's being sold on BP, run the other way.

The reality is there is too much competition chasing too little decent quality note product.  Lots of junk out there being marketed as quality. The average investor is not sophisticated enough to deal with notes.  It's not easy to understand the product, and there are a lot of land mines.


ChpBstrd

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Re: Have you invested in notes? Interested in learning more.
« Reply #10 on: January 26, 2018, 07:16:44 PM »
What about a site like Peer Street?  I have been investing in real estate loans with them for last year or so.  The site seems well managed and provides decent returns.
The main negative is that it requires you to be an accredited investor (1 million in assets excluding primary residence).

Has MMM given any updates on his experiences since his first post? I didn't see any but I may have missed it.

The experiences of MMM and several who followed him into Lending Club are painstakingly documented here: https://forum.mrmoneymustache.com/investor-alley/lending-club-time-to-panic/
Hunting for yields/dividends is a very risky strategy because making loans with looser-than-market-norm underwriting standards will always generate big yields early on, until the loans start defaulting at higher-than-market-norm rates months or years later. It's like a reoccurring investor fly trap that pops up in various marketplaces, absorbs a bunch of yield-chasing dollars, and collapses. This was the case with real estate liar loans in 2007 and it is the case now with peer to peer lending and non-bank notes markets. If you must chase yields in the debt space, here are some recommendations. There are dozens more:

PMT - Pennymac Mortgage Investment Trust, yield = 11.86%, beta = 0.5
ARR - Armour Residential REIT, yield = 9.2%, beta = 0.6
CMO - Capstead Mortgage, yield = 8.7%, beta = 0.3

Each of these offers the chance to diversify into thousands of loans, rather than risking it all on one note. Plus they're liquid. Some even offer yield-boosting leverage. I don't see the rationale for un-diversifying.

Mola

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Re: Have you invested in notes? Interested in learning more.
« Reply #11 on: January 27, 2018, 11:48:32 PM »
Notes take a lot of experience and legal knowledge. Check out https://www.pprnoteco.com and Dave Van Horn. He has a monthly call you can call into, is well regarded on the BP forums, and has been on their podcast. His company has a notefund as well as directly selling notes. The fund allows you to invest without doing the work.