Less desirable note collateral
NO. 7 Due to environmental laws and regulations, some industrial properties, gas stations and other properties with underground oil tanks likely have serious liabilities. Do not buy notes secured by these properties. If you own the note and have absolutely nothing to do with the claimed environmental damages, you probably will be sued. Plaintiffs’ attorneys sue anyone in sight. NO. 8 The higher the invest- ment-to-value ratio (ITV), the riskier the note. ITV is the amount the investor paid for the note (plus the senior lien balance if buying a junior lien) divided by the market value of the property. A deep discount on a note does not make it pay on time. Read that again. NO. 9
NO. 10 If there is little or no appreciation in the property, the loan-to-value ratio (LTV) is a barom- eter of the likelihood of default. LTV is the balance of all loans against the property divided by the market value of the property.
in descending order, includes:
• second homes • non-owner-occupied single-fam- ily homes • owner-occupied duplexes/tri- plexes (owner lives in one unit) • non-owner-occupied duplexes/ triplexes • larger multifamily properties • improved land • commercial (non-industrial) properties, such as stores, office buildings, etc. • subdivided but unimproved lots • raw land
NO. 11 The higher the down pay- ment the better.
NO. 12 Notes on property pur- chased for $1,000 down or less usually default.
> Continued on :: PG 64
W.J. Mencarow is president of The Paper Source, Inc., an educational organiza- tion for note investors and brokers since 1987. He offers a free eight-part ecourse
(Some investors use a slightly different hierarchy).
What Makes AGood Real Estate Note?
on notes at PaperSourceOnline.com.
“A single-family home can net you $10,000 per month regardless of downturns, market crashes and even job loss.” Gene Guarino RAL Academy Founder/CEO
WHAT IF YOU COULD EARN $10,000 PER MONTH NET CASH FLOW FOR LIFE? NOW YOU CAN!
CRITICAL FACTORS TO CONSIDER WHEN INVESTING IN A REAL ESTATE NOTE.
should tattoo that on my forehead. Having bought real estate notes for more than 30 years, I have a lot of “experience.” When someone asked Thomas Edison if he was discouraged about his many failures to invent the light bulb he replied, “I have not failed. I have just found 10,000 ways that won't work.” I can’t give you 10,000 ways not to invent the light bulb, but I can give you some of the most critical factors when you are considering investing in a real estate note: The value of a note ultimately depends upon the economic condi- tions that support the value of the property. If you don’t remember NO. 1
anything else in this article, remem- ber that. If you own a note in a town that has one or two principal employ- ers and the local economy tanks, your payor may lose his job and will not be able to make the payments. Foreclo- sure may be next. The property value will likely crash, not to mention the creative ways some people can destroy a house. Note investors rarely come out ahead in foreclosure. NO. 2 The most powerful financial factor that determines the value of a note is the amount of the monthly payment. All else being equal, a 10-year note with a large monthly payment and no balloon is worth more than a 10-year note with a smaller monthly payment and a balloon.
NO. 3 The best collateral is a first-po- sition note secured by an owner-occu- pied, single-family house in a good neighborhood with few, if any, rental houses in a town with a stable economy and a payor with an unblemished long-term payment history. A seasoned note (an on-time payment history of at least six months) is more valuable than a green note (little or no payment history). A good credit report only helps you to guess at the character of the applicant and the likelihood of default. People can lose their job, have emergencies or suffer other catastrophes. A credit report is most useful when it is bad. NO. 4 NO. 5
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36 | think realty housing news report :: april / may 2019
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