How I make money with notes & why this is the right time to invest

I had a conversation with a very seasoned real estate investor who asked me “Why do you like notes so much? They don’t make sense to me, why do you only settle for 8%-12% returns at best?”

While 8%-12% isn’t a bad return on your money, especially in this economic climate.  I proceeded to tell him about how I make incredible returns investing in notes, and no I am not limited to 8%-12%.

We have all witnessed a tremendous crash in real estate values in the last few years.  Many people borrowed a lot of money because of the cheap interest rates & the overall euphoria of consumption in the last decade. Let’s dissect what happens & examine the real opportunity.

Say Joe & Sally homeowners buy a home for $100,000 in 2005.  He or she borrowed $98,000 from XYZ Bank to purchase the home. Let’s assume Joe & Sally have monthly payments of $1,000 per month for the next 30 years.  Then in 2010 because of the economy, Joe loses his job & Sally is the only income earner in the family & responsible for all the bills. To compound the  problem, now the value of their home goes down to $50,000.  They fall behind & can’t make the $1,000 a month payment.  XYZ Bank has so many of these bad loans that they just want to sell the loan to an investor so they can stay solvent.

An astute investor buys the loan from XYZ bank for $25,000 the bank is happy to get rid of the loan & move on.  The investor then contacts Joe & Sally.  Joe & Sally are so happy to speak to a real person who wants to truly keep them in their home & work things out. They work out an agreement so that they can keep their home if they agree to make payments they can afford. Let’s say the agreement is for $700 month.

If we run this on a financial calculator to figure out return:

n= 300 There are 300 remaining payments due (360 months or 30 yrs minus the 5 years Joe & Sally have already paid)

i= to be solved

pv= -25,000 (amount the investor paid)

pmt=700 (the new modified payment)

the return to the investor = 33.59%

not too shabby.

The best part is that everyone wins.  The bank gets their money so they can stay solvent, the homeowner saves their home with a new lower payment, & the investor receives a great return for putting the whole thing together.  WIN-WIN-WIN

Guess what folks, there are literally trillions of dollars of debt…notes & mortgages out there that are available to be purchased for pennies on the dollar.  Many people think well, that’s great but don’t the big guys only get to play this game because they buy pools of notes in $5-10 million dollar bulk purchases?   How can a little investor like me take action & participate.

I want to explode that myth right now,  I have been buying individual notes since 2001.  I have literally bought notes for as little as $500 (although that is not a typical transaction).  There are plenty of notes that you can invest in for under $25,000, of course you can find notes at a much higher price point.  I am just trying to illustrate how accessible these investments are.  They are not limited to the Billionaires & Wall Street funds.

I hope you can see why I like notes & why I am so excited to be investing in them right now.

If you want to learn more, please don’t hesitate to contact me.  I moderate a monthly mastermind group in Los Angeles where we talk about these things & share different investment ideas.