Not all mortgage notes are equal. People often laugh when Real Estate Professionals use the phrase "Location, Location, Location". This phrase is mostly used when buying a piece of Real Estate. What most people don't understand is that this still holds true when investing in Mortgage Notes.
Tip #1: Location
You need to check out the location of the property. The mortgage note is secured by the Real Property. Knowing this the location becomes very important most people would agreed, they would rather not own a Mortgage Note on a piece of property located in the middle of a desert where the closest reminisces of other life is 15 miles away.
Tip #2: LTV (Loan-To-Value)
Percentage calculated by dividing the amount borrowed (total of all mortgage liens) by the price or appraised value of the Real Property.
1st Mortgage $50,000
2nd Mortgage $25,000
Total Liens: $75,000 divided by
Current Market Value $150,000
Equals: 50% LTV
Tip # 3: Lien Position
This is very important the higher your lien position the securer you are. The way it works can be understood using one word, "PRIORITY". Let's say something unfortunately goes wrong with the borrower/homeowner and you hold a Mortgage Note in the 2nd position the borrower/homeowner also obtained a 3rd mortgage.
The borrower/homeowner has a situation and is unable to make the monthly payments on all mortgages. The 1st mortgage holder decides to foreclose. This of course threatens your investment. By law you have the option as the holder of a mortgage note to pay the delinquent amount to the 1st mortgage holder to protect your investment. Let's say you do this, and now decide to foreclose on the borrower/homeowner.
The only mortgage note you need to maintain
is the 1st, because going back to the word Priority, this is the lien before you. In order for the 3rd mortgage to protect themselves they would need to pay all back payments to the 1st mortgage holder as well as to you the (2nd mortgage holder).
Tip #4: Note Terms
You need to know the following:
Interest Rate of the Note- To determine the yield spread premium (your return).
Terms of Repayment of the Loan- The length of time the borrower/homeowner has to payoff the loan.
Loan Type- There is two basic types, Principle and Interest and Interest Only.
With an Interest Only loan, all the payments the borrower/homeowner makes are interest. No payments made affect the principle.
Principle and Interest works the opposite. Each monthly payment affects both the principle balance and the interest. A portion of each payment is applied to the principle and interest.
Example: You lend $10,000 (ten thousand dollars) @ 10% for a term of 1year. You will receive 11 monthly payments of $100.00 and the 12th payment will be $10,100.00. Since all payments were interest only the original balance remains the same.
Tip #5: Amount of Note
Simply invest at a level of conformability. Let's say you have $150,000 (One Hundred and Fifty Thousand) you want to invest. I suggest instead of investing in one mortgage note of $150,000 you choose to invest in 3 at $50,000 each. That way should one of the notes become a problem you are still receiving payments on the other two.
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