Real Estate Notes: Balancing Risk and Reward
One of the things that the note investor has to figure out is the amount of risk they are willing to take in note investing. Any investing, including note investments, has a certain amount of risk. Though there are things that persons can do to lower the risk, there is rarely ever a sure thing in investing.
Non-performing notes normally cost less than performing notes. Consequently, the investor has a smaller financial investment. However, they also have a greater risk. One cannot know for sure if you will be able to get the note re-performing or not.
It is never certain what the exit strategy will be: due in lieu of foreclosure or a foreclosure. Since foreclosure laws differ from state to state, foreclosure can take a long time which means that you have monies tied up in an asset that you cannot monetize.
Performing notes normally cost more than a non-performing note. While they cost more, they also usually have a smaller risk. There are a number of things you can do with a performing note. You can hold on to the note and collect the payments to full term. You also have the option to sell the full note at some point in time to another note investor or to sell a stream of payments of the note (what some call a partial). Of course, it is always possible that a performing note becomes a non-performing note before the end of the note term.
Always, a note investor like any other investor has to balance risk versus reward. Are you willing to take a greater risk or a lesser risk? Do you want more reward or not? There are actions that the note investor can do to cut down on the risk. We can talk about those on another occasion.
Best wishes in your real estate pursuits. - RLW