With the right amount of diligence, both notes and property can be worthy investments. Notes may not be very popular but they are a great way to diversify your holdings as an investor…
Investing in Property vs. Investing in Loan Notes
Loan notes are one of the best ways to invest in real estate. Contrary to what you may think, you do not need to spend a lot of your time and effort trying to find the right tenants and the right location for your management company. You can let someone else do the hard job for you. Developer loan notes allow you to gain exposure to property markets and become a lender rather than a landlord. Investing in notes gives you an opportunity to earn beyond the market returns.
When it comes to investing in property, you have two options. The first one is letting out property to tenants and earning returns through rent. Another option is buying property and reselling it at a higher price.
Similarities of Investing in Property and Loan Notes
Investing in notes is similar to investing in property in a lot of ways. Both of them require you to consider factors such as insurance providers, escrow, and collateral.
Just like with property investment, location is an important consideration when investing in notes. Collateral is equally important. When investing in notes, you need to value the underlying collateral as you would for a property that you intend to own. An interior appraisal may help you. If your property is old or it has special features, the collateral should be inspected just like when buying a new property.
You need a clear title when investing in property just as much as you do when investing in notes. If you are investing in new notes, you get a lender’s policy. If your investment is an existing note, you need to check the existing policy.
You need proper insurance coverage regardless of whether you are investing in property or loan notes. If you are a note investor, you need to ensure that the person you borrow from has the right coverage.
Differences of Investing in Property and Loan Notes
Even though investing in notes is a lot similar to investing in property, there are plenty of differences. They include the following.
Lien vs. Ownership
The most obvious difference is that with property investment, the holder owns the property. With note investment, the note holder doesn’t own the property. The, instead, hold a lien against it. If a borrower does not abide by the terms of the loan, the lien holder has the right to foreclose and claim the title of the property.
Tenants vs. Borrowers
As a property investor, if you rent out your property, you will be managing tenants. Note investors, on the other hand, manage borrowers. For both cases, the investor does not need to do all the work on their own. It is possible and wise to outsource. If you are a note investor, you may outsource from a note servicing company. As a property investor, you can outsource from a rent collection company.
When investing in property, you will be buying it so you need a deed and a purchase agreement. The purchase agreement contains the details of your purchase. The deed is a document availed to members of the public. It is proof that the transaction is complete. When investing in notes, you need a purchase and sale agreement. It contains the terms of the note purchase. An Assignment is used in place of a deed.
If a borrower is unable to pay, foreclosure is an option. With property investors, foreclosure is a lot like an eviction if a tenant does not pay their rent. It is, however, much more costly. With note investment, foreclosures require upfront fees to trustees or attorneys. It can be much more complicated. The complicated and costly process of foreclosure is one of the things that scare investors away from note investment.
The risk of foreclosure is determined by the quality of your note investment. High-quality borrowers are just as essential as high-quality tenants.
With property investment, leverage is easy to obtain. This is one of the main reasons why many investors prefer property investment. The owner can enhance the financial return. For note investors, leverage is a little more difficult to obtain. While you can get a loan against your note investment, it is mostly available for high-quality investors.
Property investments are much easier to find than note investments. You can buy notes from a note exchange or a professional private money lender who deals in note investments. Investing in property does not take much energy.
Summary of Loan Notes
With the right amount of diligence, both notes and property can be worthy investments. Notes may not be very popular but they are a great way to diversify your holdings as an investor. With notes, you do not have to deal with unexpected maintenance costs or damages. The taxation rules are easy and there are no extra costs.
Even though it is amazing, investing in notes comes with a few limitations. Since you get a fixed return for a specified period, you may not have a lot of time to enjoy the benefits of long-term capital growth.
A loan note investment is not available to all investors. Only eligible ones can invest. You cannot redeem your loan note investments before the end of the term. A short-term loan note may last two to five years. You do not get any guarantee that a developer won’t default on their interest payments. You may have different levels of off-plan development risks depending on the developer. Some of them may reduce the risk by redeveloping existing buildings.
Summary of Investing in Property
Stability is one of the most important reasons why people choose to invest in property. Because of the stability, most lenders are willing to loan you cash for investing in property. You can improve the value of your property by making improvements. If you like, you can buy a property that needs some care at a low price. Do a few things to improve its value and sell it for a higher price. Investing in property gives you a chance to maintain control over your property. You can control how the property runs as you can control the tenants and the people who manage the property. Since you get to decide on the improvements to make on the property, you can always take advantage of opportunities when they arise.
Both notes and property are great investments as they have unique benefits and disadvantages. You simply need to determine what works for you. Whatever works for one investor may not work for another. Whether you choose property investing or developer notes, you need to ensure you understand the pros and cons of each of these investment options. Remember do not be swept away with what majority of people go for, sometimes people tend to go with what trends. Do not let your emotions dictate your investment, you better go for what suits you.