Investing in mortgage notes for sale can be very profitable if you know the proper way of doing it. Those who are interested in engaging in such should be aware that mortgage notes are not all equal. It is important to understand a few guidelines that involve mortgage notes investment: location, loan-to-value, lien position, note terms, and note amount.
Real estate buying is similar to mortgage notes investments when it comes to location, however, most people simply ignore or laugh off when they hear the word “location”. Not checking the location of the property can put you in a tricky position. For instance, would you want to own a piece of property that is remotely in a middle of nowhere that you have to search for more than 15 miles just to find another human being? You’ll never know, so it is always best to find out where that piece of property is located. Be mindful and ask before you confirm anything.
After location, you have to know the Loan-To-Value or LTV of the mortgage notes. This is done by calculating the percentage – getting the quotient of the total mortgage liens and the appraised value or price of the real property. Below is a sample computation:
Given the following: $55,000 (first mortgage) + $20,000 (second mortgage) = $75,000 (this is the total mortgage liens or amount borrowed) and $150,000 (current market value)
LTV = $75,000 / $150,000 = 0.5
Therefore, the LTV is 50%.
The next guideline for investing in mortgage notes is the lien position. You are more secured when you have higher lien position because you are given priority. This is applicable when something comes up with the homeowner or borrower, you possess a mortgage note in the second position, and the homeowner or borrower got a third mortgage.
Then, you have to consider note terms like interest rate of the note, terms of loan repayment, and loan type (Principal and Interest, and Interest Only). Principal and Interest works this way, the principal balance and interest are affected by each monthly payment where a portion is applied. Whilst with Interest Only, the principal is not affected by the payments, meaning the original balance stays the same. Here is an example to illustrate Interest Only more clearly:
Let’s say we have $10,000 (amount loaned) at 10% interest for a 1 year term. The monthly payments will be $100 which is paid to you for 11 months and you will receive an amount equivalent to $10,100 on the 12th month.
The last thing you need to remember is the amount of the note. If you have $200,000 and you are willing to invest that amount, do it to level where you can agree with. Do not put everything in one basket, invest in more than one mortgage note.