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The Great Strategy Debate: Note Investing Vs. Land Investing

July 3, 2024

chrisseveney

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Creating Wealth Simplified | Note Vs Land Investing

 

Get ready for a thrilling financial face-off! In this episode, we’re taking a deep dive into the contrasting worlds of note investing and land investing. Known for his love of debate, Chris Seveney navigates through the intricate pros and cons of each investment strategy, sparking lively discussions and insightful analyses. Discover why mortgage notes, despite their complexity and compliance challenges, offer unique stability and returns. On the flip side, explore the compelling case for land investing—its simplicity, lower barriers to entry, and potential for high returns with less regulatory hassle. Arm yourself with the knowledge and perspectives to find your perfect investment fit. Tune in and decide which path aligns with your financial goals!

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The Great Strategy Debate: Note Investing Vs. Land Investing

I wanted to talk about a podcast I recorded with Jamie Bateman and Mark Podolsky. Jamie’s podcast, Adversity to Abundance Podcast, took it on a little sidecar where we talked about different investing strategies. It was a debate on note investing versus land investing. For those who know me, I love to debate people. I love to go back and forth and challenge people’s investment thesis, as well as have people challenge mine because I like it when I get challenged because it strives me to want to do better. For those who do not know, Jamie Bateman, who used to be my co-host of the Good Deeds Note Investing Podcast, which is what this turned into, is also a note investor. Mark Podolsky runs Land Geeks, a very well-known and well-respected individual in the land investing space. He teaches a lot of people how to buy land to turn around and then sell their finances.

Pros And Cons

We had a great discussion that I’m going to talk about and give my opinions on the different types of investing for note investing and land investing, why I lean towards one or the other and why Mark goes back and forth as well. We did talk about the pros and cons of each in note investing. Everybody out there, note investing can be a conflict-oriented business, is one. Second, there’s a lot of compliance in dealing with consumer protection laws and understanding that we’re dealing with owner-occupied homes. There’s a lot that you have to stay on top of.

Not only with that compliance side of things, but there’s the aspect of potential litigation because things could go wrong. Where, on the flip side, when you are investing in land, you typically do not deal with those consumer protection laws because it’s not owner-occupied property. Typically, you do not run into legal issues, and it’s usually less conflict-oriented. What I mean by that is if a borrower on a piece of land does go into default, they typically will not be fighting for it. They will typically either give you cash for the keys back or let it go to foreclosure.

Creating Wealth Simplified | Note Vs Land Investing

Note Vs Land Investing: When you are investing in land, you typically do not deal with those consumer protection laws because it’s not owner-occupied property.

 

When you look at it from that perspective, there are also bonds that can go between each investing side. Regarding land, if you do take it back, land is typically less liquid than real estate, meaning that if you have a property there are typically more buyers for a property than there are for a piece of land. Land typically has a higher default rate than a home does. Typically, there’s less recourse on the land side of things than there is on a home. Land valuations typically have greater standard deviation compared to homes, meaning land prices tend to fluctuate more up and down than homes do.

From that standpoint, if you have a property or if I have a borrower go in default, the pricing, again without seeing the inside, could be destroyed, but the value of that home typically stays fairly consistent where land is more variable to fluctuations and pricing. If there’s any type of softening in markets, typically you’ll see it in land valuations first because it’s not a necessity. You’ll see typically higher defaults in land because again, it’s not a necessity. People need to put food on their table, pay for their car, pay for their house, or pay their rent, they have to pay to live somewhere. If you have a vacant piece of land and it’s something you might not be okay with losing, not hurting you, from that standpoint.

Profitability

With that being said, as I go back and forth on the ping pong match on one versus the other, Mark brought up some good points about profitability. The returns on land, when done properly are exceptional. There’s land that can be bought for a tax sale or off-market or somebody in distress. You might pick up a piece of land for $10,000 or $20,000 and then get somebody to put $5,000 down and sell or finance it, and collect the payments, and have great returns of 30% to 100%. Rarely is that the case in note investing. That can be done with land, where you make those big returns, but it’s usually in smaller chunks. Meaning, I could buy a note for $200,000 and make 20% on it, which is, let’s say $40,000, and make $40,000 on the land.

You have to have multiple pieces of property, probably not going to be on one piece. There’s the possibility that yes, it can be, but it typically takes more work, more effort, and a higher quantity than it does on the mortgage notes. Now because it takes more quantity, people think, “It’s harder,” but it’s got a lower barrier entry compared to note investing. Note investing, in our environment, I’d recommend people start with a minimum of $50,000 on their own, where I know people with note investing can start with as little as $5,000, $10,000 or $15,000.

You might get excited and say, “I want to go do land investing. I want to go buy land at tax sale. Buy off-market land or on-market land to my Boston,” which is great, but realize there’s a competition factor. There’s a lot more competition in that land space than there is in that note space. I’m probably going to go off a tangent right now a little bit as we talk about mortgage note investing because one of the things that I am starting to see is the number of people who are shying away from mortgage note investing. To me, I love it. Why do I say that?

We have a large database of investors, and I have a good amount of people I’m connected within LinkedIn. One of the things that I do every day that I started to do is send out 30 messages to people. Ten of them are in our database in my CRM system and connections on LinkedIn who may not be in my database, and then ten conversations with people on websites like BiggerPockets or other places. These were people who were interested in notes many years ago, reached out and said, “I haven’t heard from you in a while. I wanted to check in. Are you still investing in mortgage notes?” The number of people who were investing previously based on the sampling that I have is about 20%.

There were 100 investors many years ago, and only twenty nowadays. Why is that the case? It goes back to another episode recorded about the New York Fed and how number of delinquencies is at all-time lows. A number of non-performing assets is lower. Non-performing loans have gotten a lot more expensive. People were used to paying $0.30 or $0.40 on the dollar and having a lot of wiggle room in regards to, “If I make a mistake, I’m still covered.” Nowadays, those prices are $0.50 or $0.60 essentially plus on the dollar, and your wiggle room is less.

Non-performing loans have gotten a lot more expensive. Click To Tweet

You have to be very efficient in how you manage and be able to spend the time where previously, “I could work another full-time job and check on notes here and there because time isn’t as much of an essence because I’ve got this thing as such a great discount.” Nowadays, you have to be on top of every single asset every single day, which we do. We have in-house management who manages our assets, and at any point in time, we have an operation and myself who make sure we stay on top of all our assets.

I mentioned that because going back to the land versus mortgage notes, we’re starting to see a lot of competition in the land because there was a lot of money made over the last five years in land. I know some people who made great money, and I’m like, “I wish I would’ve gotten into land at that point in time,” but for me, it goes back to I try and stay focused on what we do, mortgage notes, paying with the performing and non-performing backed by property. The land side is something that I think is a good business model, but not my business model, if that makes sense.

You started to see an increase in people on the land side and a less of people on the note side. Nowadays it looks like people like short-term rentals, people are diving in and making great money, but what’s it going to look like in two years? What is the business model, and is it sustainable? On the mortgage note side, the way we look at our loans and buy them with significant equity and equity coverage, we feel very confident that we can continue to buy loans. We see several hundred million dollars a week in loans now that are performing and non-performing.

We have seen some other types of short-term lending opportunities that we have also done within our portfolio, along with our non-performing loans as part of that balanced portfolio. If we do see home prices start to come down, how will that will impact us? For us, we think it will lower prices and bring in more inventory. How will that impact the land investors? It all depends on how much they pay, but most land investors are not familiar with how to deal with defaults.

Seller Financing

What is going to happen when that occurs or we start to see more defaults or drops in valuations and people get stuck with those loans? That will be an interesting case study to see. One of the things that is interestingly enough, and again I’m going to go off tangent here for a second, is seller financing. I’m going to do a whole other episode on seller financing. I’ll briefly give a little synopsis of what that’s going to cover. I’m starting to see a lot of people do seller financing, not qualifying the borrowers and getting themselves in trouble on both ends on the lender side. On the buyer side, I’m seeing people who bought seller-finance properties where the lender financed it, put a tenant in there and now all of a sudden need a $10,000 roof, a $20,000 sewer line pipe broke.

We’ll talk more about this on another episode, but even though they have a renter in there and things are going well with the rent, they don’t have adequate cash reserve. The lender did not underwrite them and gave them little down payment to put in, or they took all their money for down payment. People were buying loans without the flexibility of any type of repairs because they had the FOMO. I’m starting to see stories of people who are now, “Now what do I do?” They don’t have the equity in the property that they thought because they overpaid as well because they thought, “I can overpay for seller financing,” and we’re going to start seeing that. That would be our next.

Creating Wealth Simplified | Note Vs Land Investing

Note Vs Land Investing: People were buying loans without the flexibility of any type of repairs because they had the FOMO.

 

Do What Fits You

Back to the land versus mortgage note debate. At the end of the day, both of us were doing the same thing because it was about how we got there. We buy loans on the secondary market and try and get the borrowers to reperform, or we do perform loans backed by a residential real estate. A business plan Mark has is he buys land at a discount, then turns around and seller-financed it out to other investors. Both business models, as I’ve mentioned, have their pros, have their cons. For people getting started, I’ll say, “Go to land because that way is less competition for me in the note space,” but it depends on what your goals are, how much money you have, and if you want to start with $5,000 to $10,000 you could do partials on a note or you could do land and understand the process.

If eventually, you want to get into the note side on the residential side, I think you’re better off going into that aspect because there’s a lot to learn about how to deal with the servicer, how to deal with state laws, understanding the laws, how to deal with attorneys, how to manage attorneys, how to manage a service, or how to go through a defaulted loan. The first time I went through a defaulted loan, it was scary, but you also have to make sure you don’t have an ego, ask questions and understand that you don’t know what you don’t know. I would ask attorneys, “This is my first time doing a foreclosure. What are the next steps? What’s the process?” In the same token, I would do a lot of research that’s out there. For example, Usfn.org provides tons of content about timelines and matrices on foreclosure that you can understand and read.

By asking the right questions and saying, “Tell me how this works, ask the question.” It’s my understanding that we’ll send a demand that’s good for 30 days and then after that, we’ll file the complaint. Within the complaint, that process might take six months. Is there going to be a mediation or typically what have you seen lately for the timing if it’s not contested?” You’ve provided a little bit of information that shows you have some education, but I hope people found this episode interesting. Another option for people to go out there as note investors. I invest in other things as well outside of my portfolio. I have rentals.

My wife invests in the markets, not invest in GameStop, but there are more ways to make money out there. The one thing I would tell anybody, as the last piece of advice I’ll give on this episode is, do what fits you. Don’t try to be the round peg and fit yourself into the square hole. Find what round peg fits into that round hole. For me, it was the non-performing and performing mortgage note space backed by property. That’s what I love to do. I also love other aspects of real estate. I love building commercial properties.

I enjoyed the multifamily building. I don’t mind owning rentals, but it’s not my preference of things. Everyone has a different preference. At the end of the day, there are many ways to make money in this world and ways to create wealth. We try and simplify it,  break it down, and provide you avenues for where you can go out and learn about this. I hope you enjoyed this episode. You can go to Jamie Bateman’s episode and listen to Mark and myself. Take care, everyone. Thanks for reading. Enjoy the rest of your day.

 

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