Misconceptions About Investing in Mortgage Loans
Updated: Nov 2, 2020
You don't need to be a huge bank to profit like a bank
The ability to buy and sell mortgage notes is not just limited to banks and financial institutions. As private investors, we can take advantage of the same profits banks do, and can do so in an LLC or in our IRA. Here are some dangerous misconceptions about note investing:
1. You have to be a bank or financial institution to buy and sell mortgages. Nope! Anyone can own a mortgage note. Transfer is quick and easy, and only involves 2 documents. It is highly recommended that you use a licensed servicer, because who would want to keep track of all that data, contact borrowers, and send out 1099's for $30 a month??? Not me!
2. Sellers want 100% of what is owed. Nope! Due to the time value of money, even performing mortgage notes always trade at discount in the secondary market. Since you buy at discount, your yield will be supercharged if the loan pays off early since the borrower will be paying off the full UPB. When banks initiate mortgage notes, they fund 100% of the loan. When we purchase in the secondary market, we might only pay 50-90% of that.
3. You must have $500,000 to invest. Nope! I have purchased notes for less than $25,000. This is one of the reason I love 2nd liens-the ability to spread my risk out among different notes in different markets across the country.
4. I will have to hold the mortgage note for the full term. Nope! Notes are highly and easily saleable, and can be done so for about $100. Also, keep in mind that the average American mortgage pays off after 10 years.
5. I will have to call borrowers and keep payment records. Nope. Loan servicers handle all records, collections, and transfer the funds to your account monthly. They even send you a 1099 at the end of the year.
6. You must be licensed to buy and sell mortgage notes. In some states, that is true, and I avoid purchasing in those states. But in the states we buy in, either our servicer is licensed, or no license is required.
Interested in learning more? Feel free to reach out to schedule a phone call.