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Achieving High Stable Returns by Investing in Real Estate Notes

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Many of our clients want the benefits of investing in real estate but not the problems associated with being landlords. Few realize that they can accomplish that goal by buying or participating in residential mortgage notes.

Investing in mortgages can provide stable, reliable returns without the problems associated with ownership. Residential mortgages (home loans) are usually provided by banks and other lending companies to enable people to buy homes.

However, sometimes borrowers are unable to secure loans for reasons outside their control. In those cases, the seller of the home can act as the bank and create a mortgage for the buyer. Many sellers hold these mortgages and enjoy the cash flow they provide. However, some home sellers/owners sell them to investors.

Since these homes are usually at low rates, they are sold at a discount to increase the rate of return. Working with a mortgage broker, stable yields of approximately 8% can be achieved.

Most people don’t know that investors can buy all or part of a mortgage. Most home loans mature in 20 to 30 years. If someone wants their capital returned in 10 or fewer years, the investment amount can be adjusted, and the term shortened to fit the investor’s needs.

Most of us have heard of the high home prices in coastal cities like Los Angeles, San Francisco and New York. Many think those are the best markets to invest in because prices continue to increase. However, when investing in mortgages, market stability is key.

Many high-priced markets saw values drop as much as 50% in the last downturn, while areas primarily in the mid-west experienced lower percentages of decline. When investing in mortgages one of the key factors is the amount of the loan compared to the home's value. If the mortgage is only 40% of the value, it will be easier for the borrower to make their payments.

It is also important to buy loans where the borrowers have a history of making their payments. Typically, investors want to see at least a 24-month history to consider a loan “seasoned”.  Borrowers who have made the first two years payments are much more likely to continue making payments.

There are many other factors to consider when investing in loans. Perhaps the most important is to work with an experienced professional in the field. Once you’ve found that, the staff at Entrust can help you take care of the rest.

Written by: Richard G. Thornton, Principal, American Note Capital.

About the Author

Richard Thornton has been in the mortgage lending and real estate investment arena for over 30 years. Having been a principal in several firms, originated over $1.5BB of loans, invested in Senior’s housing projects and “flipped” 18 properties he is currently buying and selling home mortgages for his own portfolio and others. For more information visit www.amnotecap.com.

This is a contribution article, written by a third-party. These are not the views of The Entrust Group nor do we endorse any of the information contained.

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