Performing real estate notes or the stock market: Which investment offers lower risk? Which investment is likely to produce greater reward? We answer these questions — and more — right here, right now!
When it comes to investing, the first issue an investor should consider is risk.
Funds which are invested in stock and mutual funds are unsecured investments. If, for example, a person were to buy stock in the ABC Widget Company, it is possible for that company to go bankrupt and for the value of that stock to go to zero.
Real estate notes, on the other hand, are — by definition — investments which are secured by real estate. It is possible, of course, for a real estate note to go into default if the borrower stops paying. When that happens, the remedy is foreclosure.
Because foreclosure can be expensive and time consuming, it is important for a real estate note investor to have plenty of what those in the note business call “protective equity.”
The term “protective equity” means the existence of “positive equity,” and is calculated as the difference between the current market value of the parcel of real property which acts as security for the defaulted note and the unpaid principal balance (UPB) then owing on the note (along with the balance of any senior loans, if the defaulted loan is not in first position).
The amount of protective equity should, at a minimum, be sufficient to pay all foreclosure and related costs, and thereafter allow the investor to recover the entire UPB on the defaulted note.
Thus, we see that in a “worst case” situation, it is possible for a stock market investor to lose the entire amount of an investment, while a real estate note investor should be able to at least recover the UPB on a defaulted note investment, after paying costs related to foreclosure.
After looking at risk, the next issue an investor is likely to address is return on investment (ROI).
Currently, it appears extremely difficult for investors to earn returns of five percent (5%) or more on stock market investments.
Although there can never be any guarantees when it comes to investing, a performing note that produces only a five percent (5%) ROI would, in the current market, probably not be viewed as one of the better note investments.
When deciding whether to purchase a performing real estate note for investment purposes, one should ask (and answer) the following questions:
To learn how you can add performing real estate notes to your investment portfolio, CLICK HERE
The material contained in this communication is for educational purposes only; it is not, and shall not constitute investment advice; and is not a representation, guarantee, or promise of the results you may experience. Please consult with the independent professionals of your choice, should you need or desire legal, tax, investment, or other professional advice.
The material contained in this communication is not, and shall not under any circumstance or for any purpose, be considered as a solicitation or offer to buy or sell any security or security-related product, instrument, service or investment, and is not intended for distribution or use in any jurisdiction where such distribution or use would be contrary to, or in violation of, the law of said jurisdiction, or where such distribution or use would subject The Note Company or any related entity or person to any registration requirement of, or personal jurisdiction in, said jurisdiction.
The Note Company is a Texas-based national Real Estate Note Investment Firm that helps Private Lenders and other investors reposition investment capital from under-performing uses to investments that are secured by real estate.