If you’re like some people, the thought of owning a rent house or apartment complex creates more anxiety than excitement. That is totally understandable. It’s still possible to invest in real estate related investments without the hassle or risks associated with directly owning a property.
One great way to achieve that goal is by investing in debt that is secured by real estate. Since real estate has an intrinsic and use value, and it’s relatively straightforward to value a piece of real estate, investing in debt secured by real estate is much less risky than other types of debt (auto loans, personal loans, etc).
There are actually several different ways to invest in debt, we can go into them one by one in detail:
- Buy an existing note.
- Sell a home via owner financing.
- Finance a property that is being purchased from a third party.
- Become a private lender for a real estate investor.
Buying an existing note – This is the easiest option for obvious reasons. There are lots of websites where note investors post their notes for sale. They can usually be purchased for less than the outstanding balance of the note which will increase your yield higher than the actual interest rate on the note. Some note investors season all their notes for a year or more and then sell them, others only sell the problem notes. For those reasons it’s important to attempt to get as much information as possible about the borrower and the payment history of that note. It’s also important to attempt to develop a relationship with note sellers, this can pay off in multiple ways in the future. It’s also possible to buy distressed notes from banks, often these are 2nd mortgages that are no longer performing. If I’m being honest there are too many different note buying strategies to list in one blog article.
Sell a home via owner financing – Owner financing can be a great way to get into note investing, however that normally means you actually have to buy a home and deal with the hassles of getting it on the market, showing, etc which may defeat your purpose. There can however be an extreme upside on this where a home can be purchased at a discount for cash, then sold at a premium for financing without you having to put any time or money into it. I definitely recommend a large down payment (10% or more) and checking the credit and income of the individual who is buying the home. If you’re doing this on a regular basis you may want to have a mortgage originator process the applications to avoid some government red tape.
Finance a property being purchased from a third party – There’s nothing stopping you from “being the bank” for a home buyer. Again there is no shortage of options for this from home equity loans to first mortgages, bridge loans, and everything in between. Some people are surprisingly capable of repaying a debt but cannot get a loan from a bank for one reason or the other, or they could get it from the bank but want to avoid the hassle. You can solve their problem and get an above average return on investment in the process.
Become a private lender for a real estate investor – In my opinion this is the best option. Seasoned successful real estate investors come across deals on a constant basis, but very often don’t have the capital available to take advantage of all of them. You can achieve a mutually beneficial relationship by lending them money for those extra projects they otherwise wouldn’t be able to do. I have had several private lenders throughout the years and paid rates from 6% up to 14% (most are between 8% and 10%) depending on the deal and how long I expected to need the money. It works well for me because I can operate faster and with no bank fees, and it works well for my investors because they receive a first lien on the property and monthly interest payments with a return that is well above average! It’s a win-win!
There is no single answer that is right for everyone. Each strategy comes with it’s own positives and negatives. It really depends on your short term and long term goals to help narrow down what would be best for you! If you’d like more information on becoming a private lender for my projects please email me at kevin@kevindmay.com.