How to Make Money on Real Estate Notes
Making money from real estate notes can be challenging, time consuming and competitive, but it can also be rewarding. After reading this article, you'll know how to start investing.
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Things You'll Need
- Funding source with ready cash
- Title and escrow company
- Mortgage loan expert with underwriting experience
- Attorney
Instructions
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The money you want to invest has to be in cash and readily available. If you don't have your own funds, consider setting up a line of credit with a bank. This takes time, but it can be well worth it if you can perform more quickly than your competitors.
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Set out your investing goals. Knowing in advance the minimum return you need will save time for you and the seller of the note. Investors make money on real estate notes by buying them at a discount. For example, a $10,000 note that pays 5 percent interest yields $500 per year. If you buy the note for $5,000 and still collect the $500 interest payments required by the note, your return will be 10 percent.
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Determine your costs. Can you handle collections on your own, or do you have to outsource it? If it's outsourced, what does this cost? What are your costs in software, hardware and supplies if you handle collections yourself? Will you send periodic statements? If the payments are late, what does it cost to enhance collection? Finally, determine the cost and method of sending out the IRS 1098 forms at the end of the year.
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Evaluating the note is the most technically difficult part of the process, and someone with proper expertise, such as a mortgage lender with some underwriting background, should evaluate it. If the note includes a trust deed, its position (primary or junior) is critical. If it's a land sales contract and requires a judicial foreclosure in the event of a default, it must be valued accordingly. The condition and market value of the underlying property must be evaluated. So must the creditworthiness of the borrower.
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Locate sources for acquiring notes to purchase. Escrow companies that do collections are one source. A small ad in the real estate finance section of the newspaper often draws sellers of notes. Craigslist is another good place. So are private lenders and mortgage companies.
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Have a real estate attorney draw your sales contract. The expense may seem high, but you'll probably use the contract over and over.
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Tips & Warnings
People selling notes usually need a lump sum of money quickly. Try to close within two weeks. Stay with your investment strategy.
Always consider the worst-case scenario---that you may have to foreclose on the property.
