As a real estate investor, there are a number of ways to make money.
While most people think of buying homes and reselling them, some investors prefer to have properties where there is a continuous stream of money coming in.
This could be more beneficial in the long run, depending on the business model. This investment opportunity can be found in buying bank notes.
What are bank notes?
Bank notes are written obligations to pay certain amounts within a specified time frame with interest.
The mortgage is a security instrument and pledges the property as collateral so the note holder can sell the property to make a profit on the investment if the payer defaults.
How are buying bank notes beneficial for investors?
Banks sell notes all the time, and buying bank notes is a widely used practice. Investors can purchase bank notes from banks for significant discounts.
This is reminiscent of a garage sale, when banks are trying to get rid of bad notes to allow their books to make space for new ones.
Banks discount their bank notes because they do not want to foreclose on homes due to the expenses attached to this process.
For investors, this is a good deal because banks will sell the note for cash for a lot cheaper. Investors see this as a worthwhile opportunity to acquire new properties at significant discounts that could provide a greater ROI.
For those homeowners who stay in the home, this is good for the homeowner and the investor to possible restructure the bank note.
Advantages of bank note buying over short sales
Although both of these transactions are similar, buying bank notes over a short sale means that the home owner can remain in their home if the person who bought the note agrees.
Once the note is purchased at a discounted rate, the payments may become more manageable for the homeowner, recreating equity and giving them a chance to salvage their property.
The homeowner can make the decision to remain in the home, or sell the property to make a profit.
With short sales, the process is different. This can take a long time, and the homeowner’s credit may be significantly affected.
What are the risks in buying bank notes?
With any investment, there are some risks involved. The real estate industry fluctuates all the time, and when you own bank notes, you have essentially become the bank.
The payments are made directly to you, and you are responsible for fixing anything on the property if you have tenants or the homeowner remained in the home.
Just like a bank, if the mortgage is not being paid, you have the right to take the home.
There are a number of things that can occur:
- The value of the home could go down
- You may purchase a note that has too many repairs which makes it a bad investment
- The rent does not cover the repairs and monthly maintenance
One of the main advantages of buying bank notes is that you can purchase them in or out of a retirement account.
If you are purchasing them for your retirement income, this will allow you to purchase it within a self-directed IRA. That keeps your money in the account on a tax deferred based, or in some cases, tax-free.
Private bank notes can be beneficial through seller financing.
How does this work?
The seller will agree to lend the buyer most of the purchase price, in which the borrower must pay off the principal after five years. In most instances, the borrower obtains a conventional loan to keep the home.
If the borrower cannot pay after the time period has elapsed, the note holder can take the home. The only risk the note holder has is if the net sale proceeds don’t cover the note balance.
Once an investor purchases a mortgage note they can operate as a private lender to lend money to home buyers at rates above the market. They do this by using the property as collateral.
This practice is very lucrative and attractive to investors who have obtained the note at a discounted rate. It should be known that there should be a limit as to how much one is willing to pay for a private mortgage note.
It’s important to make sure it will be worth the time, money, and effort involved in securing the note, and in generating the income to make money from the investment.
A note investor should be very familiar with the market they deal in, and should only buy or sell mortgage notes to individuals who are close by in a local setting to monitor the transactions and payments being made.
While it can be an intricate process, there is money to be made investing in bank notes.
Knowing how to navigate to get the best return is key. Once you have this process down, the investments will pay for themselves.
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