I’m often hesitant to tell people that you can easily make 80 or 90% on your money when you invest in notes. They think it’s too good to be true, but it is one of the easiest note strategies of all.
Notes are sold at a discount – you build your profit in right up front. Not only will you receive the interest that the Borrower is paying on the note; you will also receive additional profit in the form of whatever discount you negotiate with the note seller. For example, if you buy a $100,000 note for $70,000, in addition to the interest the Borrower is paying, you’re going to collect an extra $30,000 over the life of the loan.
Your rate of return is actually a combination of the interest that the Borrower is paying based on the terms of the note, plus whatever discount you have negotiated. This means that the less that you pay for a note, the greater your rate of return!
For example, if the Borrower is paying, let’s say 6% interest on the note, your real rate of return could easily be 15% or more because of the extra profit you’ll receive from the discount, which you’ll receive over the remaining term of the note.
But what happens if the note pays off early? Instead of waiting ten or twenty years for your money, what if the Borrower sells the house or refinances with a bank and pays you off three months after you bought the note? Your rate of return goes through the roof!
You might be thinking, “Sure, Donna. But how often does the Borrower pay off early?” It happens often enough on its own, but I always watch for notes that are likely to pay off early—those are the notes that I like to keep for myself in my self-directed IRA.
For example, if the Borrower has excellent credit and is paying a much higher interest rate than the current mortgage rates, there is a good chance that they will refinance. Or if the property happens to be for sale, you’re going to be paid off when it sells.
Example of One of My Real Note Deals
One time, I bought a $150,000 first mortgage that no one else seemed to want. People were worried because there was also a $60,000 second mortgage on the property that had a balloon coming due in two years. What they saw as a red flag, I saw as an opportunity to dramatically increase my rate of return. You see, the Borrower was a top executive in a local corporation, and he had excellent credit. So what do you think he’s going to do in two years when he has to come up with $60,000 to pay off the second? He’s going to refinance and pay off both the first and the second! And that is exactly what happened, and my rate of return more than doubled.
But here’s the real secret – don’t sit around and hope that your notes pay off early. Be proactive! You need to incentivize the Borrower to refinance. First of all, have a good mortgage broker on your team of professionals who can help your Borrowers to refinance. Many brokers will even help the Borrowers to improve their credit score in order to get refinanced. Then, you simply call the Borrower and tell them that you know a great mortgage broker who could help them to lower their interest rate on their mortgage. With the windfall that you’ll receive from the early payoff, you could even offer to pay their closing costs for them as an added incentive!
One very important point – when you get the early payoff and the super high rate of return, don’t stick the money in the bank making little or no interest! In that case, you would have been better off without the early payoff. When you get the early payoff, you want to immediately buy another high yielding note and start the process over again. This is a great way to increase your net worth at record speed.
Example of One of My Student’s Real Note Deals
Take a look at the deal in this short video that my student, Rick, and I did together. My investor wound up with a 96% rate of return. When you see the possibilities, you’ll realize why notes are the fastest, safest, easiest way to make huge profits in real estate!
Donna Bauer, The Original NoteBuyer®
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