Notes on Notes – Part 1

Notes on Notes – Part 1

A few years ago, while attending Pete Fortunato’s Paper Course (which he teaches in December each year in Tampa, Florida), I became aware of just how much power, flexibility and opportunity there was in paper, specifically notes.  Through a host of amazing connections, I have aggressively pursued note investing.  Based upon my experiences as a note investor and as counsel to other note investors, I want to share some of my “notes on notes.”

The enormity of the industry and opportunity is overwhelming.  If your focus in the real estate space has been on the dirt, bricks, fix and flip, then the paper world is mindboggling at first.  The potential profit in that world is huge as well.

Before we go further, let me set forth a distinction.  I will use the industry term “mortgage” to refer to a note and mortgage or note and deed of trust.  If I use the term “note”, I am talking about a different type of agreement to pay that is not secured by real estate.  It may be secured by tangible, personal property such as a car or boat, or it may be an unsecured personal note.  Most of what I write about will be regarding notes secured by mortgages and deeds of trust (“mortgages”).

To really understand mortgages, you need to know quite a bit about real estate, but you also need two additional things.  You need to know how to use a financial calculator, and you need to be good at reading.  I’m referring to the ability to thoroughly read and understand everything in the collateral file related to the note, which would include the mortgage, appraisal or BPO, credit report, borrower’s loan application, payment history, servicer notes, etc.

People invest in mortgage notes for one of two reasons.  Either they want to buy cash flow, hopefully at a discount, so they can enjoy a steady, consistent stream of income; or they buy notes with the goal of reselling them for a profit (note brokering).  I personally have done very little in the note brokering space, but I have represented individuals who do that.  I am the guy who looks for long-term cash flow and wants to structure the deal to give me that cash flow with an above-average rate of return in a tax-free or tax-deferred manner.

When it comes to using a financial calculator, there are plenty of videos on YouTube that can help.  One of the best things I did (for a very affordable cost) was download a financial calculator app called “10bii” onto my phone.  That way, I have a financial calculator with me wherever I go.  I also have a financial calculator in my briefcase at all times.

After reading this post, feel free to share it with a friend, and then jump on YouTube to find out more about using a financial calculator.  This is an important tool for anyone doing note investing.