Savvy real estate investors have been acquiring notes from banks as long term cash flow vehicles for years. But can they really work as short term investments for capital growth, too?
Note flippers have been around for a while, too, but most simply don’t have a great source for good notes or don’t really have enough knowledge and experience to make significant profits in the short term. Notes as cash flow investments can work well, but investors should also anticipate having to take possession in the case of default every now and again. In the last few years this has obviously been a big headache for those who paid too much for what turned out to be junk notes in declining areas with bum borrowers.
However, in the current market, those who can get right to the source and buy good notes from banks (even if they haven’t been performing perfectly recently) can effectively use them to build up their nest eggs in the short term as well as enjoy high income returns.
There are three basic ways to buy notes as a short term investment:
1. Target Properties it Pays to Acquire
Buy non-performing notes from banks at a significant discount, in an appreciating marketplace with the hope that borrowers continue to default. This can put the property in your hands just as the equity is blooming. Just make sure these are properties you really want or can sell quickly.
2. Season the Note and Add Value
You can buy notes from banks which haven’t performed perfectly, get borrowers back on track, season the note with one-time payments and flip it as the property value comes back and your interest rate remains far superior to what else is on the market.
3. Flip Them
If you have the right software and connections to buy notes direct from banks you can often simply flip them immediately to those with less time and expertise, who are happy to have someone feed them notes for a smaller spread, providing they don’t have to do any heavy lifting.