One area of opportunity in your portfolio is buying second mortgage notes. Second mortgage notes, sometimes referred to as junior liens is a lesser-known area of investing. However, they can be extremely profitable if they are purchased correctly and from the right sources.
What is a Second Mortgage Note?
Second mortgage notes are exactly what they sound like. They are second to the senior note in the order of repayment in the event of a default. The two main types of second mortgage notes are HELOC, or home equity line of credit and a traditional second mortgage. The conventional second mortgage is often used by first time home buyers that do not have the down payment required to qualify for a note.
When we discuss buying second mortgage notes, we are typically referring to non-performing mortgage notes. A non-performing second mortgage note is a junior lien that has not been paid for typically 90 days or more. When junior loans go into a three-month default, the banks are usually looking to unload it.
These notes are typically four to five figures and can wreak havoc on a bank’s large balance sheet. They should offload them to a third party at a significantly reduced rate.
Because many of these junior liens or second notes have not been paid in 90 days, they are referred to as non-performing notes. These notes sell for pennies on the dollar. The notes sell so low because of the risk involved with purchasing them.
Smart investors will spread their dollars over multiple notes, so they are covered in the event of a total default on one. The great thing is because of the overall low percentage investment; you can ride out the defaults with minimum impact to your portfolio. It is essential to use a broker to help you through the process in the beginning.
It is such a different but underutilized way to invest; you will need some guidance at the start. Plus, it feels safer to invest with a professional.
Purchasing your notes
It is essential to consider where you are buying your junior notes. Also, if you need to sell some of your investments, do your research before you sell your mortgage note. Working with experts to help guide you through the process in the beginning stages of your investing career can save you thousands of dollars of mistakes you may have made.
Diversifying your portfolio is a wise choice for any investor. While some may say that buying second mortgage notes is risky, we would argue that the risk is mitigated by the high return on investment from paid notes.
You almost have a built-in cushion for the risk of total loan defaults to help see you through. Plus as any investor would tell you, spread your dollars over as many second mortgage loans as possible to help mitigate the risk involved with this investment type.