Real Estate Notes: Balancing Risk and Reward

One of the things that the note investor has to figure out is the amount of risk they are willing to take in note investing.   Any investing, including note investments, has  a certain amount of risk.  Though there are things that persons can do to lower the risk, there is rarely ever a sure thing in investing.    

Non-performing notes normally cost less than performing notes.   Consequently, the investor has a smaller financial investment.  However,  they also have a greater risk.   One cannot know for sure if you will be able to get the note re-performing or not.   It is never certain what the exit strategy will be:  due in lieu of foreclosure or a foreclosure.     Since foreclosure laws differ from state to state,  foreclosure can take a long time which means that you have monies tied up in an asset that you cannot monetize.

Performing notes normally cost more than a non-performing note.   While they cost more, they also usually have a smaller risk.   There are a number of things you can do with a performing note.  You can hold on to the note and collect the payments to full term.  You also have the option to sell the full note at some point in time to another note investor or to sell a stream of payments of the note (what some call a partial).   Of course, it is always possible that a performing note becomes a non-performing note before the end of the note term. 

Always, a note investor like any other investor has to balance risk versus reward.   Are you willing to take a greater risk or a lesser risk?   Do you want more reward or not?  There are actions that the note investor can do to cut down on the risk.   We can talk about those on another occasion.   Best wishes in your real estate pursuits.  -   RLW

7/2/2020- What is the Most Valuable Real Estate Asset?

Back during the early days of the COVID-19 pandemic, I spent more time than usual at home.   As a person who likes to be productive, I spent a lot of time assessing my business plan and whether I needed to make adjustments in light of the changing environment.   I spent much time during this period listening to webinars to learn from others.    As I listened one day to Jeff Watson, attorney and real estate investor, he said one thing that really resonated with me and it was this:   “What is your biggest asset?”    As Jeff talked, he stated that he had determined that his greatest asset was not the real estate properties he owned and rented, but the tenants who rented them.  That was a “wow” moment for  me.

Most of us are tempted to brag about our real estate and note exploits:  the houses we have bought and flipped… the properties we have rented… the passive cash flow we have coming to our mailbox every month… the notes we bought… the notes we created… the yield we are getting on our real estate note or our rentals.     While those are important to know,  perhaps we need to remember that PEOPLE are at the heart of any good note investing or real estate investing business.   If that be the case, then perhaps the biggest assets of a real estate investor or note investor are these:

·         The persons who sell us a real estate note

·         The person or enity that we sell a real estate property or a real estate note to

·         The person that rents our real estate property or makes a payment to us each month

What is your biggest asset?    Perhaps it is the property or the paper.   I agree with Jeff Watson.  Our biggest asset is the people that we do business with.   Thanks for reading.   Until next time, best wishes in your real estate and note investing pursuits.-   RLW

6/3/2020- Building Your Brand as a Real Estate and Note Investor

Back in 2005, I spent some time in the African country of Zambia visiting a family member who was a Peace Corp volunteer.    Zambia is a beautiful place with the variety of animals, warm people, and scenery.   I recall one day being out in the middle of nowhere when we came upon a little store.   Though that area of Zambia did not have electricity or running water, that store had something that I see often when I visit store in my area:   Coke.    Coca Cola has done a great job building its brand to the point that it is recognized in even the most remote parts of this world

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 There are some companies here in the USA that we know well as they have built their brand.  Most of us know that the golden arches are a symbol of McDonalds and that a curved arrow made into a smile is the symbol for Amazon.     Most of us also know that “just do it” is the slogan for Nike.   If you are a real estate and note investor and want to increase your business, it is important that you also build your brand.  There are several things that are important for one to do as you build your brand:

·         People need to feel that you are provide a reliable, trustworthy service or product

·         People need to feel that they know you and trust you

·         Building your brand is something that is done over time.   It has taken decades for McDonalds and Coke to build their brands, and it will take many years for you to do the same.  You build  brand in a myriad of ways such as the following:

·         Interacting with people at real estate meetings, note events, and other gatherings

·         Social media posts, podcasts,  and video

·         Marketing through letters and emails

While perhaps it is unreasonable for a real estate or note investor to aspire to have a brand as well recognized as Amazon and McDonalds, it is not unrealistic for them to do that bit by bit.   What will you do this week, this month, and this year to help build  your brand?    Best wishes in your real estate, note, and wealth building pursuits-  RLW

5/3/2020- A Little P.E.E.P. Talk

I have always loved sports.  I must confess that I am better at watching sports than I am playing them.   One of the things that is common in the sports world is a coach giving their team a pep talk.   The purpose of the pep team is to put a little pep into a team in hopes they will rise to the occasion to win the game.    Today, I want to offer encouragement  to you as real estate and note investors on some things that I think are critical right now as we as a nation and world find ourselves in this pandemic.   I am calling this a P.E.E.P. talk and you will see why in these points below.   Here are my points:  

·         This is a Time to PAUSE-  Pausing is not necessarily a bad thing.  Isn’t that what coaches do when they take a time out.  Pauses can effective in playing music and they also can be effective in negotiating a deal.  I encourage you to take a moment to pause in your real estate and note business. 

·         This is a Tim to EVALUATE-   Here are some important questions right now to ask yourself.  Where am I in my personal finances and business finances?.. Where can I trim expenses and increase income?.. How is my real estate income changed or going to change?....   Who do I need to talk to and communicate with- bankers, tenants, borrowers, etc.?....  Evaluate what cash flow will continue or  what you need to change… Will your lender will take less or whether a tenant will pay less instead of not paying at all?   Evaluation is critical right now in business including the real estate and note business. 

·         This is a Time to EDUCATE- Talk to fellow  investors, mentors, coaches, others… Listen  to podcasts… Attend webinars… Read articles and stay tuned on Linked In,  etc.. Phone  a mentor or someone who might offer counsel… If you think you know it all, you will soon be proven wrong in your arrogance.  Volatility offers Opportunity and education yourself to try to see where opportunity might be in the days ahead. 

·         A Time to PLAN-   If  you fail to plan, then plan to fail.  Perhaps you need to re-invent yourself or your business model in these days.  what can you control and what is out of your control….  Cannot control the wind, but can adjust your sails.  Do I need to seek new sources of capital

Yes, this is a P.E.E.P. talk.   Pause…Evaluate… Educate… Plan.    Best wishes in your real estate pursuits.  -   RLW

4/3/2020- Adjusting Your Sails

Over 10 years ago, my wife and I bought a place in a condo complex on the Intracoastal Waterway of the Carolina Coast.  We were fortunate to buy the property at a bargain price since it was a foreclosure that was a victim of the real estate crash in the 2008-2009 period.  I enjoy the view the property offers us especially the sight of boats heading south in the Fall and Winter and north in the Spring.  Sometimes, we see sail boats heading past our condo and more than once I have day dreamed wondering what place they are heading.  I have never been sailing though I did have two uncles who were proud veterans of  the U.S.  Navy.  

 

I find myself thinking of sailors and sailboats in these days as the world around me faces a pandemic and challenges I have never seen before.   Specifically, I thinking of a saying that someone familiar with sailing told me years ago and it is this:

You cannot control the wind, but you can adjust your sails

These are days when all of us are adjusting not our sails, but adjusting our lives.  We are learning how to work from home and stay at home… how to cook more at home and eat at a restaurant less…  and how valuable a job that people like  store clerks do with simply seeing that shelves are stocked with toilet paper.  

I encourage you as note investors and real estate investors to pause in these days and consider where you are.    What changes do you need to make in your personal finances and spending?   What changes do you need to make in your business plan either by necessity or because of the opportunity?     In these days when you are spending some time at home and less time out, reflect on your life and business.    Talk to and listen to others. 

Best wishes in your real estate pursuits.  -   RLW

3/3/2020- Sources for Capital to Purchase Notes and Real Estate

In the 1996 movie Jerry Maguire, actor Tom Cruise plays a sports agent.  There is a scene in the movie where actor Cuba Goodling Jr. (playing a star NFL football player)  tells Cruise over and over to “show me the money”.     That is the plea of every real estate investor as they want to be shown the money not just in a deal, but to complete a deal.   Most investors struggle to have the monies to buy a piece of real estate or to buy a real estate note.  This is certainly one of the biggest challenges for many real estate investors.  It has been particularly challenging in these days following the housing crisis that happened a little over a decade ago. 

You will find below 10 possible sources for capital to purchase real estate notes or to purchase real estate.   I have used many of them and had some success with them.  Let me caution you that some might be workable solutions for you or they may not be.  Some of them are short-term solutions to get you in a deal while others might be long term solutions.  Let me also caution that some of them come with some risk as the source of funds (e.g. borrowing from a life insurance policy) is not what the  funds are intended for.  I encourage you to think carefully about using some of these sources and consider the advantages and possible disadvantages they offer.  If you have questions about my use of some of these sources, please be in touch.

Here are 10 sources for capital to purchase a real estate note or to purchase real estate:  

·         Borrowing monies from a retirement/pension account

·         Borrowing monies from a friend or relative

·         Borrowing monies from a life insurance policy

·         Credit  Cards

·         Personal Savings

·         Home equity line of credit or loan  on your personal residence

·         Cash out/ refinancing of a rental property

·         Business line of credit

·         Personal loan

·         Business loan

Best wishes in your real estate pursuits.  -   RLW

2/3/2020- What is the Value of my Real Estate Note?

One of the things that people want to know often is how to determine the value of a real estate note.   A few weeks ago, I got a call from a friend who wanted the same.   I spent several minutes asking him questions about the note, and I suspect he was impatient with all my questions.   Just as it  takes a little investigation to determine the value of a piece of land or a house, so it takes a little investigation to determine what is the value of a home.    Here are some of the things that I will want to know about in trying to determine the value of a real estate note>

THE PROPERTY-  Tell me about the property.  Where is it located?   Is it in a growing, stable, or declining neighborhood?   How many bedrooms and baths does it have?   What is the BPO on the property?

THE BORROWER-  What is the credit score of the borrower?  Do they have a job or source of income?    Do they pay in a timely manner?   Information about the borrower is critical in determining the value of the note.

WHAT IS THE BORROWERS’ SKIN IN THE GAME?-   What size down payment did they make when they bought the property? 

 SEASONING-  How many payments have they made on the note (also referred to as seasoning)?  

 WAS THE BORROWER QUALIFIED FOR THIS NOTE OR LOAN?-     Dodd-Frank federal regulations require that a person buying their primary residence should be qualified by a registered mortgage loan originator.     Did you have the borrower qualified?   That can influence the value of the note?

THE PAPERWORK-  Are the taxes paid up to date?   Is the property insurance current?  Are their liens and judgment on the property?    Do you have the loan serviced by a third party loan servicer?  These can affect the value of a note.

What is the value of a real estate note?   My general answer is that “it depends” on these factors. Best wishes in your real estate pursuits.  May it be a great year.-   RLW