One of the things I really love about notes is their ability to diversify investment. By this I don’t mean across separate asset classes, like spreading your money between stocks, bonds, and real estate. What I’m referring to is the ability to spread capital over multiple notes to reduce your overall risk. When people think of buying a note, they often think of investing a large amount of money—$100,000 or more. This not always the case. You can buy a great note for between $10,000 and $20,000. This allows you spread your investment money over multiple motes. It provides stability and diversification because not all your eggs are in one basket. If one of the eggs breaks, you still have plenty to eat.
Let’s use an example for reference. Suppose you have $100,000 sitting in your IRA, earning 3 percent (if you’re lucky). You could do one of the following things:
- Buy one note for $100,000 (and expect to earn about 10 percent interest per year).
OR
- Buy five notes for $20,000 each (and expect to earn about 10 percent interest per year).
Which would you rather have? I would prefer having the five notes in my portfolio, because diversification provides safety. If something goes wrong with my single $100,000 note, the income I receive could be delayed for months while I work things out with the borrower or foreclose. On the other hand, if something goes wrong with one of my five notes, I have four more depositing money each month like clockwork. It just makes good sense. This is one of the things I enjoy about note investing.
You can also further diversify by investing in notes of different types or classes. You can buy notes on residential properties (one to four units), commercial buildings (like office parks or strip malls), trailer parks, and even raw land. I personally prefer residential properties, but there are different notes that are just as lucrative if not more so. Choosing the right mix of assets is a personal choice which takes reflection and planning.
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(This article is an excerpt from Joshua N. Andrews Book titled Paper Profits – How to Buy and Profit from Notes a Beginners Guide)
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