The biggest differences are depreciation and appreciation. From a tax perspective, there are no depreciation advantages with notes. As for appreciation, the face of the note is the face of the note, but sometimes when purchased at a discount, there can be a “phantom appreciation” because note values directly correlate to property values. When real estate values go up the value of the notes go up. Another plus with purchasing a note is that you don’t need any credit, or have to “qualify” like you would have to do for a mortgage to purchase real property.
Many new note buyers are afraid of the “F” word, Foreclosure. If a tenant of a rental property doesn’t pay rent you have to take the tenant to court by filing for eviction. Not only do you lose rent, but you have to evict them, pay court costs, fix the property and re-rent the unit. Usually, without recourse since many tenants do not have assets. With a homeowner, if they miss any payments and there’s equity in the property, you can collect the missed payments, late fees, corporate advances and any attorney fees. By attaching these items onto the loan balance, per your loan documents, you will recover these fees at some point, as long as there’s enough equity. There’s also a significant difference between a homeowner’s mentality and a tenant’s mind set. The homeowner usually has more invested into the property like “pride of ownership” and “sweat equity”.
You can do almost anything with a note that you can do with real property.
You can flip or wholesale a note.
You can rehab a note. Turn a non-performing note into a performing asset.
You can refinance the borrower.
You can sell the full note or you can recoup your original investment by selling a partial.
You can borrow against the note, since it’s an asset, also known as a Collateral Assignment.
Increase your IRA or retirement account returns by using these funds to invest in notes.
Increase your cash flow from equity in real property.
You can borrow against the equity in a property and invest in a note to increase your return from that same property.
Increase your return on investment (ROI) on equity when selling real estate by offering terms. For example: “Holding Paper” or “Owner Financing”, Carrying a second mortgage, often allows the seller to achieve a higher selling price.
Better financing and leverage when buying real estate through the use of Notes and Seller Financing. You can get a higher return (ROI) on a rental property if the seller assists the buyer with financing.
Private Notes used for “Rehab Loans”, are usually more affordable than a “Hard Money” lender.
Cash for Keys: Purchase the property from the former homeowner who is going through foreclosure. You give them a certain amount of money, they sign the Deed in Lieu. You will avoid any fees attached to the property and the homeowner avoids having a foreclosure on their record. You can then either sell or rent the property.