Are you considering venturing into the realm of alternative investments to boost your passive income? Mortgage note investing can be a lucrative opportunity for those seeking to diversify their portfolios. However, before you dive in headfirst, it's essential to be aware of the potential pitfalls that come with this investment strategy. To help you navigate this terrain successfully, here are the top 5 pitfalls to watch out for:
Due diligence is crucial. Failing to assess the underlying asset, the paperwork, and other relevant factors can lead to unexpected expenses and wasted time. Any analysis that you do needs to assume that at some point, the borrower will stop performing and you will have to go through foreclosure. While that's not likely to happen, analyzing each property as if it will will keep you out of trouble. You can't prevent the future or the market, but you can mitigate your risk by doing thorough due diligence on the investment.
You also need to do due diligence on the person you are buying the note from. Individual notes are sold on the secondary market and can come from a variety of sources, including other individuals, banks, or funds. The track record and integrity of the person or group is very important.
Contrary to popular belief, note investing, even performing note investing, is not passive. It's similar to owning a rental property where the property manager is your servicer, and you don't have tenants. You need to manage your property manager. There are details that they track that you need to make sure they are tracking, like property tax payments and homeowner's insurance, regardless of the loan being escrowed. Servicers employ people and people make mistakes. The saying is try that no one cares about your money or investment like you do. Trust but verify.
In the unlikely event that your note goes non-performing, you need to have a plan on next steps. Do you sell it because you don't want the hassle of managing a non-performing note? Do you work with the borrower to get them back on track or offer a loan modification? Do you start the foreclosure process? Knowing how you're likely to respond to this unlikely event will take the risk out of your investment.
Delegate delegate delegate. I started my note investing business during the pandemic, and I was able to grow my business because I wasn't able to do anything but delegate. Property preservation, servicing, and legal work are all things you should be delegating, especially in states where you need specific licensing to do debt collection.
To sum up, while mortgage note investing can offer attractive returns, it's essential to approach it with caution, thorough research, and a sound risk management strategy. By being aware of the potential pitfalls and taking proactive measures to mitigate risks, you can maximize the benefits of this investment avenue.
Remember, knowledge is your most powerful tool in the world of investing. Educate yourself, stay informed, and always seek professional guidance when needed.
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