MORTGAGE NOTES

  • SECURED BY REAL ESTATE.  Now this becomes useful when you want to get your money back if the borrower decides not not pay.  Actually we usually hope the borrower does not pay since we will make MORE MONEY if we get the house back.
  • SUPER PASSIVE.  A performing note produces monthly income month in and month out for years without you having to personally collect the payments, taxes, insurance and send 1098 when using a servicer.
  • HIGHER YIELD.  The yields are higher than the stock market average over time.  We like to use Compound Annual Growth Rate (CAGR) as a Key Performance Indicator (KPI) in our business and you will see that the CAGR for the S&P500 (with dividends) is typically much lower.
  • CONSISTENT.  Each and every month payments come in and not for months but for years.  No wild swings or ups and downs like in the stock market…just monthly mailbox money.  Similar to an annuity but no huge fees and much higher returns and SECURED by a hard asset.
  • SET AND FORGET.  Mortgage notes are unlike other investments where you have to constantly have to monitor external influences.
PERFORMING LOAN EXIT STRATEGIES:

  • MONTHLY PAYMENTS. Performing and re-performing notes pay consistent payments of passive income which can be collected by a servicing company for a nominal fee which makes like easy on the investor.
  • SALE PARTIALS.  You can sale a portion of your note to get back some of your upfront capital.  For example, you sale of 60 of the 180 payments you are going to collect and then the note reverts back to you on the 61st payment.
  • FLIP THE NOTE.  You can buy a note and then immediately sale the note for a profit.

NON-PERFORMING LOAN EXIT STRATEGIES:

  • LOAN MODIFICATION.  Non-performing loans (NPL) can be modified to fit the borrowers financial situation and produce income at possibly higher yields since these notes are purchased at a steep discount.
  • DEED-IN-LIEU. Another exit strategy for NPLs is to get the borrower to deed you the property in lieu of foreclosure.  This saves the homeowner from having a foreclosure on their credit and you get the house without the expense of a formal foreclosure.
  • SHORT SALE. You as the mortgage note owner would have to agree to accept less than the full amount owed.   Since you purchased the note at a discount this also could be a profitable exit.
  • FORECLOSURE.  Once the foreclosure is complete you as the note owner now owns the house (unless a third party buys at auction).  You now have several options.  You can sale the property, you can rent the property, you can sale the property with seller financing, land contract or lease to own (lease option).
  • PERFORMING NOTES.  Typical cash on cash return of 6-7%.  Characteristics of these notes are consistent cash flow but no upside.  With a 1% default rate, this high quality paper will be held by money center banks such as Bank Of America, Chase and JPMorgan.  
  • RE-PERFORMING NOTES.  Typical cash on cash return of 8-10%.  Characteristics of these notes are cash flow and limited upside.  These notes by definition are paying 12 months or longer on time in full.  These notes are a great income stream but must be purchased at enough discount to get some downside protection.
  • SUB-PERFORMING NOTES.  Typical cash on cash return of 11-14%.  Characteristics of these notes are cash flow and upside.  Better equity protection and good cash flow but requires more intense management to avoid borrower default.  More hands on.  
  • NON-PERFORMING NOTES.  Typical cash on cash return of 15-30%.  Characteristics of these notes are no cash flow upfront but big potential upside.  Non Performing notes are most widely available and generate large returns and quick return on capital if managed properly.  However, they provide no current yield, are high touch and high maintenance assets.

DISTRESSED ASSET MARKET SIZE AND FOCUS AREAS

Click on the images below from the left to right and this will give you an overview of the market size and the best locations.

OVERVIEW OF THE LOAN MODIFICATION PROCESS

Click on the images below from the left to right and this will give you an idea of “how it works” and an example “by the numbers”.

THE UNDERWRITING PROCESS AND KEY EXIT STRATEGIES

Click on the images below from the left to right and this will give you an idea of the underwriting process and some of the common exit strategies.