Cash Flow notes are a secure and easy strategy to use for real estate investing because they reduce risk and eliminate the liability associated with owning property. No tenants, no vacancies, no rehabs, no negative cash flow, and no headaches.
Real Estate investors love cash flow notes because of the
maximum profits with overhead almost eliminated, and
your investment is secured by the property.
It'll spoil you because basically all you need to do is collect and cash a check each month. With direct deposit and payable online options the investor has little left to do but monitor the account. This is the true definition of long term passive income.
Act like the banks.
Investors have options to create and hold, buy turnkey, or sell with cash flow notes.
Let the principles of the time value of money make you money. Interest rates are low creating the opportunity for investors to borrow money and loan it out again making large spreads, just like the banks.
Lend the money out to other investors or to potential homeowners. Use contracts for deed, lease options, subject to, and land contracts as legal instruments to creatively structure cash flow notes.
Your investment is secured by a tangible asset - the real estate.
Its also secured with a recorded mortgage or deed of trust.
And in some cases with cross collateralization with an assignment of rents, and alternative assets like boats, businesses, and stocks.
When structuring your cash flow notes build in a little security and use a contract for deed. You'll retain the deed to the property until your buyer pays off the mortgage. The deed to property is held for collateral- just like a car title. Plus because the property remains in your company name or land trust, you retain the tax benefits.
A contract for deed strategy will keep you in the best position to take repossession of the property if the buyer stops paying. No foreclosure is needed since you still own the property. Simply file an eviction. Its a fast solution that saves you time and money.
PRO TIP: And to any investor out there that needs to file a foreclosure action, instead, offer a deed-in-lieu to the delinquent buyer and in exchange for their cooperation forgive the deficiency. You'll get the property back quickly and without the court process. Plus you'll get it back in good condition.
The higher the ITV (investment-to-value ratio) the riskier the note. If there is little or no equity or appreciation in the property,
the LTV (loan-to-value ratio) is a indicator of the likelihood of default.
So, set your buyer up for success.
Get a large down payment, the higher the better.
And since your buyer has put down between 10- 20% and maybe some sweat equity too, they don't want to loose the house.
The higher equity in the property; the safer the deal.
A quick basic guideline is SFH 70-90%LTV, Rental 70-75%,
Multi 60-75%, Land 40%
The ideal properties for creating cash flow notes are in good condition in family neighborhoods with buyers who have slightly blemished credit due to a job change or downsizing of their household. These types of owners are willing to pay a higher than average interest rate for a second chance and to get their family into a stable and solid home.
Negotiating, structuring and the language of the contract are cash flow generators for investors. As an example of structuring: when offering owner financing, an easy method used to manipulate the numbers is to offer to finance the points into the loan, its a sweet structure that will give you a better return and a higher monthly payment.
Use leveraging strategies and invest without acquiring debt, think
equity financing instead of debt financing. Buy with OPM then sell
owner financed and collect money on the spread.
Buy through a self directed IRA for tax deferment benefits while building your portfolio. + Another advantage is that the funds do not need to be from your IRA, you can use money from anyone's IRA, however only the IRA used will get the deferred tax allowances.
Because they can be found in all areas, one of the best choices for OPM is private money lenders. It takes a little time to find and establish your company with them but software and systems make the process easier. Its important to do it because you'll get money that's available to you at a low interest rate, 24/7 and without contingencies and hoops to jump through.
And you don't need good credit or large sums of cash.
Instead use creative financing strategies. Just use a wrap around mortgage with an existing mortgage and a mortgage assignment.
The current loan stays in place, a new loan is formed that wraps around the old loan. You make a money from both the interest rate spread and the selling price. When the new buyer pays off the the new mortgage balance, you pay off the old loan. And each month you collect a check for the difference between the interest paid and the interest collected.
Properly structured and negotiated cash flow notes are in demand.
They're a specialized niche of passive income that builds and balances
real estate portfolios and are looked at as a glorified form of
Continually collect monthly checks for the term, or you can sell your note for fast cash. You'll find buyers nationally and locally for your deals. By understanding their buying criteria before you create the note, you'll have an instant buyer for your paper with just a quick call or email. Instead of flipping houses you're flipping paper.
Control property by buying the paper secured by it.
The most powerful factor that determines the value of the note is the monthly payment amount. Amortized cash flow notes are more valuable than notes with a balloon, it's because the payor may not be able to fulfill their obligation to make the balloon payment.
And a seasoned cash flow note is better than a green note with limited or no payment history.
You can invest turn key style by buying (at a discount) performing and non performing notes from other investors and banks.
The best ones to look for are privately held by investors or business who have “carries back,” “holds” or “takes back” some or all of the financing. Just search public records in the recorded deeds and mortgages. Your search can be automated with software programs that generate this information and online marketing services that will send direct mailings for lead generation.
We like to buy Class A, insurable FIRST lien position loans.
A note in the first lien position is always in the best position.
And there is money to be made in non performing notes. Its all about positioning, structuring, and modifying an existing loan to make it perform again. Currently the US government is giving cash incentives to investors who modify loans. Then the cash flow note can be held for monthly passive income or after 6 months of consecutive payments, it can be sold off as a performing note.
Buying a second position lien note can be good if you always avoid the ones that have a huge balance on the first lien. And scrutinize the first mortgage, remember that in case of foreclosure on the first mortgage, the owner of the second (you) would need to pay the mortgage of the first to take possession of the property.
Before buying a note the basic due diligence must be done. Confirm today's market value of the property securing the note. Verify the terms, outstanding balance and the payment schedule. Check for property taxes escrow funds and property insurance payments. Also check for judgments, IRS liens, public utilities and mechanical liens.
Get all the paperwork signed over to your company transferring all rights, title, and interest; it includes all property securing the note and the note itself. Get the original promissory note. This is important because its the negotiable note you're buying and it states the rights you'll be able to enforce for non-payment of the debt, if needed.
And last but not least, after you have completed the purchase of the note, notify both the note payor and insurance company of the update.
Take advantage of both the national banks and local mortgage companies inventories of performing and non performing notes. Due to their inability to deal with the headaches of servicing non-performing loans, buying defaulted notes from institutions can be done in bulk packages just like bulk REOs.
The hidden niche of cash flow notes will kick your business and profits into gear by providing the opportunity for both short term and long term real estate investment strategies while offering you flexibility with reduced risk.