I had a discussion with a note investor last week about why an opportunity exists in notes. We first talked about the supply side, and why notes are available on the secondary market. But then we got into why there aren’t more note investors. There is a standing army out there of buy and hold renters, fix and flippers, wholesalers, and other assorted real estate investors. I’m not an expert in those fields, but it appears to me that you can get higher returns in notes with much less competition. At the Note Expo last fall Eddie Speed said that he thought there were about 5,000 individual note investors out there in the United States. Why are so many people chasing thin returns in other forms of real estate investing in this hot market, and ignoring notes? If the returns are so good, shouldn’t that number of note investors be more like 500,000? It got me thinking about some of the reasons why. Here are my opinions:
- Most people don’t even realize that note investing is possible.
- Whenever I tell someone that I buy mortgages, their response is often a combination of surprise and confusion. Most people simply assume that you have to be an actual bank to do this.
- Its hard to find information on note investing.
- There aren’t many note investors out there, so most people don’t know one that they can learn from. Training programs certainly exist, but even the most well known ones are fairly niche. They can also be quite expensive. That won’t stop the serious investors but it will definitely keep the masses away. Even if you do sign up for a training program, you still have to put the work in and develop your own business model.
- You have to be very detail oriented to be a note investor.
- Don’t get me wrong, there is no rocket science involved with note investing. I say that as a former rocket scientist. But there are a ton of details that need to be accounted for. You have to build due diligence checklists, do a lot of work to find good sources of notes, find the right vendors to work with, build a solid financial model and ROI calculator, and several other things. Then you need to execute and follow up on everything relentlessly. None of it is really difficult, but its a lot of work. And let’s face it, most people out there don’t like details and don’t have the stomach to deal with it.
- A certain scale is required to make it worthwhile
- Its a lot of work to figure out notes and set up all of the seller, funding partner, and vendor relationships, and then develop all the systems and processes for a successful notes business. It simply doesn’t make sense if you are only going to do 1 or 2 notes. Most people aren’t going to go all in on such a niche industry.
- Most people don’t take action
- Let’s face it. Most people like the thought of being an entrepreneur and working hard and making things happen. But few will actually go through with it. Sometimes this is simply a lack of motivation, other times its fear of failure or fear of the unknown.
So why is answering this question of why there aren’t more note investors important? Whether you are a stock investor, real estate investor, hedge fund manager, or a poker player, you always have to understand where your edge comes from and why it is you are able to make money in your field. If you don’t have an answer for this and have been making money, it probably means you have been just been getting lucky, or you are simply riding an up market. You always have to understand where your edge comes from. I think its possible to have a large edge in the note business, due to the large supply of notes out there, and the relatively small pool of other note investors that exists because of the reasons above.
Why do you think there aren’t more note investors? I”m interested to hear your thoughts.