How does investing in non-performing notes vs. rentals compare?
What are non-performing notes?
Notes are the financial or paper side of the real estate business. The house is the collateral backing the note, which in a worst-case scenario, we can take back or repossess if the borrower fails to pay as promised. However, even in a worse case, we have ways to work with the borrower to keep them in their home.
Non-Performing Notes Vs. Rentals
Notes Have Lower Initial Investment. According to Brandon Wilborn at Hi Note Funding LLC, “If we compare a note and rental property with an equal market value of $120,000. Right off the bat, your average note already has an advantage.”
“Why? Because the note value is almost always going to be secured by a property that is more valuable than what’s owed.” Banks don’t loan on the full market value of a house but require some amount of down payment. With non-performing notes, investors often buy the note at a discounted price on the secondary market.
For The Same Income, Notes Have Fewer Expenses
Assuming an income of $1,000 on each investment, the rental property will have a property management firm that averages about 10% of the monthly rent. That’s a $100 per month taken out. Similarly, you’ll want to have the note serviced by a third party, both for simplicity, compliance, and other benefits. Note servicing typically runs, at most, $50 per month. Further, there are other expenses on the rental property that take a chunk out of the monthly payment. A rental investor will allow for vacancies, property taxes, insurance, maintenance, and sometimes other expenses (accounting, tax preparation, improvements, etc.)., and Insurance.
So, once you add all those conservative expenses together, the total profit on the rental side is only going to be $600 per month vs. $950 for the note investor. And that’s not counting the mortgage bill that many rental investors have to pay from that profit.
That’s over 50% more profit per month than rental houses! Plus, the benefit of avoiding the headaches that come along with rental ownership.
Why Invest in Non-Performing Notes Vs. Rentals
There’s more cash in your pocket with notes compared to a rental.
- The collateral property for your note will be higher than your note.
- Typically it’s the property owner (not the bank) who’s liable for what happens on their property
- One of the biggest secrets to building real wealth is keeping what you’ve earned. And notes have proven they offer more profit vs. rental property.
Paige Panzarello, the “Cashflow Chick,”Founder of The Tryllion Group, Investor/Entrepreneur having done $150 Million+ in real estate transactions; Specializing in Non-Performing Notes. She has been a regularly featured guest on “The Cashflow Guys” podcast, and you can also find her on many other Real Estate and Entrepreneurial podcasts, and in the Wall Street Journal as well. She also speaks at various Real Estate Investing clubs and conferences across the country. Paige teaches the “Building Wealth with Notes” Workshop that drills down into the details of how to successfully buy Non-Performing Notes, create a passive income, and mitigate risk. www.CashflowChick.com/training
Surviving the crash of 2007, Paige knows how “life happens” every day. Her passion is to help people build wealth, secure their financial future, to enjoy life, and to be ready-not broken! Whether it is improving communities one house at a time, helping borrowers stay in their homes, or working with other investors to learn a new way to earn higher investment dollars for their retirement years potentially, Paige is dedicated to helping people improve their lives in every way. For more information got to www.CashflowChick.com
