NUTS & BOLTS
MORTGAGE NOTE INVESTING
time-consuming or difficult bank requirements. For exam- ple, banks can sometimes decline loans simply because a person owns too many houses.
This strategy is particularly useful if you purchase large packages of properties. Sometimes, keeping the entire bulk purchase for rentals can be too much. Instead of selling off any “unwanted” properties on the open market, create mortgage notes via seller financing. You will expand the benefits of that bulk purchase dramatically. “The last time I bought a pool of houses, there were 30 prop- erties, nearly all with deferred maintenance, in that portfolio,” recalled Laura Cabrera, an Arkansas-based investor whose company, Oakwood Investments, purchases pools of non-per- forming first liens and then leverages the investment properties in a variety of ways. “That much maintenance was too much at once,” she added. Cabrera ultimately opted to sell off a few of the houses her- self, using seller financing to get the deals done. She retained the benefits of monthly cash flow thanks to her note on the property, but reduced her maintenance load because the buyer took over that responsibility as the new owner. “It was definite- ly a win-win,” she said. Investors in some states may benefit from selling a property through a land trust instead of through conventional seller financing. Handled properly, this strategy expedites the return of the property to the note-holder in the event of a default on the loan. Breakdown: Investor gets collateral, or a “safety net,” on future payments. Borrower is accepted as a tenant with an added level of accountability. Experienced landlords may use note investing to mitigate risk when renting to a high-risk tenant. In this instance, the landlord will have the high-risk individual sign a promissory note for the rent within the contract. However, this promis- sory note may be difficult to collect if the renter falls behind on their rent because the note is unsecured. “So, secure it!” said Pantak, who has had success securing high-risk tenants’ on-time payments with the help of a co-signer, who allows the promissory note to be attached to their house or other prop- erty. “Of course, paperwork is important here as well,” he said. OPTION 3 MITIGATE RISK OF DEFAULT ON A HIGH-RISK BORROWER
• POTENTIALLY GENEROUS, CUSTOM TERMS FOR THE LOAN
Seller-financed loans may permit an investor to buy with little or no down payment or stretch out the term of payment over a longer length of time than a conventional mortgage or a private money loan. This may lower monthly payment obligations and increase potential profit margin. • LOWER INTEREST RATES IN SOME CASES Depending on the seller, a buyer may be able to negotiate a lower interest rate than what a bank would offer. All these things can combine to increase an investor’s leverage and improve their cash-on-cash return. I f you decide to use seller financing either to buy or sell property, be very certain your legal documents are designed with your strategies in mind. Furthermore, be careful to file all paperwork according to state and local lending regulations, as well as federal law. “If the contract is not written or recorded correctly, an investor can trigger a Due on Sale clause if they decide to sell their seller-financed property,” warned Mark Pantak, owner of Capital Resources Group, a private equity firm with a diverse array of investments in its portfolio. “You’ll see investors have to pay off the seller in full if this happens, so make sure you always have a trusted attorney and title company on board with your team,” he added. OPTION 2 CREATE A NOTE FOR YOUR OWN PORTFOLIO Breakdown: Investor gets a mortgage note. Buyer gets the chance to own a home. Landlords use seller financing as an exit strategy. This can be especially effective with lower-priced houses, generally those valued at less than $50,000. Landlords must qualify the borrower based on their specific needs as an investor, however. While you may not have the same requirements as a bank, you must have some parameters for your borrowers. PROTECT YOURSELF FROM TRIGGER-HAPPY LENDERS
MaximizeYour Rental Portfoliowith Note Investing Strategies
WHEN “OPPOSITES” ATTRACT, THE RETURNS GET VERY INTERESTING.
byWilliam J. Griesmer
n some ways, note investing is the opposite of landlord- ing. A note is designed to be paid off a little each month. A rental home can be held indefinitely, and rents raised. Definitely different. But did you know that many experienced real estate investors combine active property management with the power of notes and paper finance to improve their work processes and their bottom line? It’s a powerful combination. There are several different techniques landlords can use to achieve this combination for themselves. Review them all, then select the one that is right for you. OPTION 1 INVENTORY ACQUISITION THROUGH SELLER FINANCING Breakdown: Seller gets a mortgage note. Investor gets a rental property. Buying on seller financing, which is the process of borrowing directly from the seller to buy a property, is one of the most effec- tive ways to get started acquiring rental housing inventory. In the role of the buyer, an investor gains multiple advantages, including:
SELLER FINANCING: Seller financing involves the previous owner of the property, the seller, making a loan to the buyer so that this individual can purchase the home for sale. This is a legally binding note that usually holds the home as collateral. Sellers may do this in order to sell quickly, obtain a higher purchase price, or simply because they wish to own a mortgage note that will generate monthly income.
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FAIRMARKETVALUE (FMV): An estimate of the market value of the property.
Bill Griesmer is the Managing Member of Stonegate Capital, which buys and sells performing and distressed notes. He may be reached at firstname.lastname@example.org.
This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal, and accounting advisors before engaging in any transaction.
• NO DEALING WITH THE BANK This eliminates the need to prove income or meet other
86 | think realty magazine :: march 2018
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