Did you know that you could literally be the bank and generate generational wealth? Traditional Real Estate investing, while lucrative, is not for everyone. There may be an issue with having funds to purchase properties. Whatever the case may be if you want to be involved in Real Estate in a non-traditional way, and generate passive income. This article is for you.
Brought to you by: Chubb Family Homes
Investing in real estate notes, or "being the bank", is a way to generate passive income and the opportunity for business-savvy individuals to showcase their skills.
Before you go around calling yourself "Chased" or "US Bank of Ballers", let's talk about what a Mortgage note is first, shall we?
In some circles, mortgage notes may be referred to as "real estate notes". Just know they are one and the same when doing your research. There is no right or wrong way to describe it. It's going to depend on your audience.
Let's get into it.
What is a Mortgage Note?
When you or anyone, purchases a residential property (we are not discussing commercial properties at this time) without having the entire purchase price in cash, they will be required, by any lender, to sign what is called a "promissory note". This is a legally binding document that requires the signer to pay whatever is remaining after they have paid their down payment but over a period of time. The amount is not due all at once. Hence the establishment of a mortgage each month.
Are you with me so far?
Basically, the promissory note is a contract between the buyer and the lender that says, "I as the buyer, agree to be 1000% responsible for and repay this debt I'm about to create".
What is Mortgage Note Investing?
Now that you have a basic understanding of what a mortgage note is, let's talk about what it means to invest in them.
"Note investing" or "Investing in Mortgage Notes" is an entire process that involves purchasing the mortgage note, also referred to as debt, and the Deed or Deed of Trust, it can even just be called mortgage.
Once you purchase the debt, you then become the lender/the bank. What that means is that YOU begin collecting payments from the borrower/homeowner, and not Chase, Not Huntington, Not PNC. YOU!!! Yep, one more time for the folks in the back. YOU BECOME THE BANK.
Don't leave just yet. I know you may be thinking, how can someone with a regular 9-5 invest in a mortgage note? How can I possibly compete with these banks? Easy!
People like me, and hopefully soon, you, invest in mortgage notes by purchasing them at a discounted rate. That's how we make a profit. When the borrower has paid back the entirety of the "mortgage" you will have made a lot more money than you invested to purchase that note. Don't run off yet, I haven't even told you the price range.
Before I get to the cost, I want to talk about a Mortgage vs. Deed, as it relates to this type of Real Estate Investing. This way you know whether you want to be involved or not, regardless of how inexpensive it is to get started. While passive, there is some action involved.
Mortgage Vs. Deed
One of the things you want to do right away is dive into a deep and thorough understanding of a "deed" vs a "mortgage". Look at the definition and what's the difference between them.
I'll keep it simple for you here. A traditional mortgage consists of two parties only. That's the homeowner/borrower and the bank or lender. It could be a private lender. It's not always a bank or financial institution. It's a very simple and straightforward investment, in that you only have to purchase the mortgage directly from the lender. That's one person, no middlemen.
Deeds on the other hand require a bit more time and patience as they typically involve three or more parties, depending on how many times the deed has transferred lenders. The three parties are the Trustor also known as the borrower, The lender of course, and a Trustee who actually holds the deed to the real estate. The Trustee has the legal right to sell a property if the Trustor/borrower defaults on their payments.
As you can see, Deeds may be a bit more challenging to handle when just starting out. I suggest sicking with mortgages until you understand how to navigate this world and its resources better. You are free to do what you wish, however. Just a friendly piece of advice I wasn't afforded.
So let's talk about the types of mortgage notes there are the types you want to focus on investing in for legal and other reasons you can find out about during your research.
Mortgage Note Types
It's critical that you understand all of the different types of mortgage notes that are out there, even if you don't plan on investing in them. There are 2 types, Performing notes and Nonperforming notes.
A note is considered to be "Performing" when the borrow is making their payments on time, they are not in danger of default, and are not in arrears of any kind.
As you can guess then, a non-performing note is one where the borrower IS in default. At 30 days late, the note is designated as "sub-performing". When it reaches 90 days late, it then becomes "non-performing". Keep in mind, this is a general rule of thumb, but each lender can set their own terms.
We focus on Non-Performing notes here at Chubb Family Homes, for 2 reasons.
1.) As a private investor, we have more flexibility to help the borrower get back on track, by setting more favorable terms, ultimately keeping more (Black) families in their homes.
2.) Alternatively, if the homeowner does not want the home, instead of going into foreclosure, the borrower will deed us the home. The homeowner gets to move on, and we get a house we can sell or rent out as an Airbnb to recoup our costs and investment. Often times that is 4-10x more. Especially for a home valued at more than $100,000.
DISCLAIMER: That's an ideal situation. There are times when foreclosure is the only option, which is a legal eviction of a homeowner. This will allow the lender, you to regain the title through the courts. Each state has its own set of rules about whether the court is required. States that oversee the foreclosure process are called Judicial Foreclosure states. Ohio is one of those states. It's why we don't invest here. Non-judicial states like Minnesota, Florida, and Georgia, proceed with a foreclosure much quicker. Often, just a few short months, where court facilitated can take several months to years, depending on the state.
We've made it easier for you: All 50 states' Judiciary Status for Foreclosures
Today there are nearly 800,000 nonperforming loans—defined as those delinquent for 90 days or more—on single-family homes, reflecting $135 billion in unpaid principal, according to loan-data provider Black Knight Inc.
“It’s a market that really is the result of the financial crisis,”
Andy Walden, the firm’s director of market research, said.
So let's talk about 1st and 2nd position, now that you know the two types of notes available, and why 2nd mortgages are good for first-time beginners, unless you don't want to negotiate or take risk then 1st mortgages are best for you.
First-lien notes and second-lien notes are both mortgage notes, meaning they use the same documents and bestow the same legal rights to collect on the debt. They simply have different lien positions. The lien position is the priority the note is paid off, especially in the event of default.
DISCLAIMER: A first-position mortgage note is the most secure because it'll be paid first. If a note is in the second position, it's inferior to the first. A second-position note will only get paid once the first position is satisfied.
So why bother with 2nd lien mortgages? The equity in the home! It's the most profitable and best long-term strategy to buy second-lien mortages for a few thousand dollars, and with equity already established in the property. That becomes yours should they default. Second-lien notes typically yield 10-50% and even more ROI. You can always foreclose and have a property in another state. Again, turn it into an Airbnb, and we can even help you do that.
Let's move on.
Pros & Cons of Mortgage Note Investing
As with any worthy investment, there comes a risk. Let's start off with the Cons and finish on a positive note.
The Cons:
Default of the loan is a possibility in any note investing scenario. You have to have a plan B and be prepared in the event it happens again. Remember, they are already in default so the tendency is there. Get everything signed and notarized and put stipulations in. If I give you this chance and you screw me? I own it. Flat out.
If the property is taken to auction by the FIRST lienholder, it can go to auction and you lose your money IF the property sells for less than what you paid for the note.
Notes are NOT insured by the FDIC.
Now the good stuff...
It's passive income that you can add to your portfolio. Millionaires create 7 streams of income and they are a mixture of passive and active streams. You cannot physically or mentally have 7 active income streams. You are not a robot. Nor can you IMMEDIATELY survive on passive income designed to build wealth over time...
Since you don't have to pay a real estate agent or property manager, you save money.
You control the loan. YOU are the bank. You control the new interest rates of the loan.
By now, you have either decided this is for you and "peaced" out, or you are super intrigued at how we can get hip to "THEIR" secrets and set our children and grandchildren up. Build generational wealth and break generational curses.
If all you have to leave behind in this world is 500,000 followers, We feel sorry for you, sis.
You can buy a mortgage note for as little as $800 or as much as $30,000. How much is that BBL worth to you NOW?
Where Can I Buy Mortgage Notes?
The internet is amazing and as the days pass, more and more places, which of course need vetting, pop up that claim to sell and manage the paperwork process of purchasing mortgage notes. Be careful. We've paid thousands of dollars and spent the past two years learning and implementing everything we are sharing with you.
If you want to learn where to buy mortgage notes, what research needs to be done on each note, and more. Please contact our CEO, L. Renee' Chubb, by scheduling a FREE 30-minute session to get you started. You can attend her Mortgage Note Investing One-on-One Coaching for $497 for 10 hours of coaching over 4 weeks.
See you next week! Next week we'll be discussing Beauty Supply Store Profits. Let's gooooo!