What is a note?

Simply put, a note is basically a promise to pay. It’s a debt instrument and they come in two forms, secured and unsecured. 

One example of an unsecured note is something that most people have experience with is a credit. Every time you use your credit card, you essentially create a note with an obligation to pay that money back to the bank in the future. 

It’s unsecured because there is nothing tied to it, no collateral a lender can go after in the event that you don’t pay.

A secured note is the opposite. It’s a debt that’s secured against a piece of property or an asset (the collateral) that can be claimed in the event of a non-payment.

In real estate, that’s typically a house or piece of land, but it can also be a vehicle, machinery or other capital investments, all kinds of stuff.

By investing in notes, you are basically buying the debt–i.e., the obligation to be repaid by the person who was lent the money in the first place. 

Now, with notes you can be either in first or second position, third, forth, etc.. Generally speaking, I prefer to be in first position, and focus on non-performing notes secured by real estate. 

Many investors are comfortable with purchasing notes in second position (or later positions), but when you’re in second position you run the risk of the house being foreclosed on, and having your investment wiped out by a foreclosing first position lienholder That is something I definitely don’t want to have happen!

 

 

 

 

 

 

 

 

 

 

The reason I like non-performing notes in particular is that I can buy them at a big discount.  And I buy at a discounted rate of the current market value of the house.

I build in a cushion of equity right at the time of purchase, which mitigates my risk. 

One important thing is that I don’t buy notes based on how much money is owed, because sometimes these properties are underwater, and I don’t want to over-pay for the note on an amount that I may never see. Also, if the market corrects, and it always eventually does, the value of the house could drop.  Becasue I bought at a discount, my risk is mitigates against that drop. 

So even if the worst happens, and we have a crash, I’m faced with maybe just breaking even, or a very small loss, rather than being totally wiped out.

So those are the fundamentals of note investing. Peaked your curiosity?