The real estate industry has boomed in recent years; thanks to the ever-increasing number of prospective home buyers. Notes, in particular, have gained a lot of popularity with a lot of investors looking to try their luck in this area. Despite this growth, many people still don’t understand how notes work. If you’re one them, read along!
So, what are real estate notes? Real estate notes are contracts for loans, which are usually for a specific period of time, with fixed payments, and have specific descriptions such as ‘first lien’, ‘second lien’, or ‘mortgage.’ Basically, notes mean the loan documents, deeds of trust, and land sale contracts. In other words, they are promises given by the borrowers to repay the loans over a given period.
They are created when two transacting parties in the industry reach an agreement. On doing so, one of the parties receives capital that’ll help them acquire a property. When this money is repaid, whoever receives the repayment is the holder of the note.
As you would expect from all investment fronts, there are gains and losses. In this article, you’ll take a look at some of the advantages and disadvantages of investing in real estate notes.
Pros Of Real Estate Notes
- High Return Rates
Every investor expects returns from whatever they put into the business. Well, there are some investment schemes that have barely any returns and there are those that generate a lot of profits. Real estate notes fall in the latter category. With return rates of about 9% for long term loans and 15% for short term loans, you’re likely to make a good amount of money if you follow a good strategy.
- The Investor Access Full Mortgage Amount
Anyone who invests in real estate buys the whole amount of mortgage loan. As such, they’ll constantly receive monthly payments for the property for a given period of time. If within five years the owner decides to either resell or refinance, you as the investor will enjoy an early payoff.
- Returns Are Almost Guaranteed
The fact that notes are tied to real properties means the investor will always have a backup plan of recouping their funds. For instance, if the homeowner goes bankrupt and defaults on the loan repayments, the investor has a right to sell the property and regain his or her capital. Therefore, there are very few chances of one making huge losses.
- Easier To Manage
The real estate market, as you already know, is very wide. There are different potential investment plans one can use to make money. Perhaps the most popular of them all include renting out, buying, and selling of properties. These, however, involve dealing with the property directly, which means you’ll have to take care of the maintenance expenses and such. Renting out your houses, for instance, can be quite stressful if you have to follow up each one of the tenants. Eviction of unreliable tenants and hiring of contractors are some of the problems that landlords have to cope with in their line of duty.
With real estate notes, however, you can avoid most of these problems. For one, you’ll not be forced to follow up your tenants or do any renovations on the property in subject since it’s technically owned by someone else. As such, it’s safe to say real estate notes are quite easy to maintain or manage. Once you’ve bought, you’ll just sit back and wait for the repayments.
Cons Of Real Estate Notes
- Risk of The Loan Being Defaulted
When it comes to disadvantages, there aren’t many of them. Perhaps the biggest con is the risk of the loan being defaulted. Of course, as earlier stated, you can always sell the owner’s property to recover money. However, the process of liquidating the assets in itself can be quite demanding.
The real estate notes have become quite popular in recent years and it’s probably something every investor should consider. One of the biggest advantages is the fact it has high return rates. As an investor, you’re also guaranteed of your money at the end of the day since there’s a backup plan in case the owner defaults on loan repayments. Of course, the processing of recouping your money in such situations—which involves selling of property—can be quite demanding on your side. Nonetheless, the benefits of investing in real estate notes outweigh its disadvantages. You can now make your decisions based on the facts presented on this article. Happy investment!