Are you ready to dive into the world of note investing but feeling overwhelmed by the options? 

🤔 You’re not alone! One of the biggest decisions new note investors face is whether to focus on performing or non-performing notes. In this comprehensive guide, we’ll break down everything you need to know to make an informed choice that aligns with your goals and risk tolerance. 

Let’s dive in!

The Basics: What Are Performing and Non-Performing Notes?

Before we dive into the pros and cons, let’s establish a clear definition of each type of note:

Performing Notes: These are loans where the borrower is making regular, on-time payments according to the terms of the mortgage. Think of these as the “golden children” of the note world – they’re doing exactly what they’re supposed to do.

Non-Performing Notes: These loans have fallen behind in payments, typically by 90 days or more. They’re the “problem children” that require more attention and often come with both higher risks and potential rewards.

Now that we’ve got the basics covered, let’s explore the advantages and disadvantages of each option.

Performing Notes: The Steady Eddie of Note Investing

 Pros:

1. Predictable Cash Flow: With borrowers making regular payments, you can count on a steady stream of income.
2. Lower Risk: Since the loan is current, there’s less chance of default or foreclosure.
3. Less Time-Intensive: Performing notes generally require minimal management, making them ideal for passive investors.
4. Easier to Understand: For newcomers to note investing, performing notes are more straightforward and less intimidating.

Cons:

1. Lower Returns: The stability of performing notes comes at the cost of potentially lower yields compared to their non-performing counterparts.
2. Higher Purchase Prices: You’ll typically pay more upfront for a performing note, as there’s less risk involved.
3. Less Room for Creativity: With everything running smoothly, there are fewer opportunities to add value or negotiate better terms.

Non-Performing Notes: The High-Risk, High-Reward Option

Pros:

1. Higher Potential Returns: The discounted purchase prices of non-performing notes can lead to substantial profits if successfully resolved.
2. Opportunity for Creativity: You have more options to work with the borrower, potentially restructuring the loan or negotiating a favorable outcome.
3. Lower Initial Investment: Non-performing notes are often available at steep discounts, allowing you to enter the market with less capital.
4. Potential for Property Acquisition: In some cases, you may end up owning the underlying real estate, which can be a valuable asset.

Cons:

1. Higher Risk: There’s a greater chance of total loss if the borrower can’t or won’t resume payments.
2. More Time and Effort Required: Resolving non-performing notes often involves extensive communication, negotiation, and possibly legal action.
3. Emotional Challenges: Dealing with distressed borrowers can be emotionally taxing and requires a different skill set than managing performing notes.
4. Steeper Learning Curve: Success with non-performing notes often requires more specialized knowledge and experience.

Making the Right Choice: A Decision-Making Framework 

Now that we’ve laid out the pros and cons, how do you decide which path is right for you? Consider these factors: 

1. Risk Tolerance: Are you comfortable with the potential for higher returns, even if it means taking on more risk? Or do you prefer a more conservative approach?

2. Time Commitment: How much time can you dedicate to your note investing business? Performing notes are generally less time-intensive, while non-performing notes may require more active management.

3. Investment Goals: Are you looking for steady, predictable income (performing notes) or the potential for larger, lump-sum payouts (non-performing notes)?

4. Experience Level: If you’re new to note investing, starting with performing notes can help you learn the ropes before tackling more complex non-performing deals.

5. Available Capital: Consider how much money you have to invest. Non-performing notes often have lower entry points but may require more reserves for potential legal fees or property repairs.

6. Skill Set: Do you have experience in negotiation, real estate law, or distressed asset management? These skills can be particularly valuable when dealing with non-performing notes.

7. Market Conditions: Research current market trends. In some economic climates, one type of note may present better opportunities than the other.

Real-World Examples: Bringing It All Together  

To illustrate these concepts, let’s look at two hypothetical scenarios: 

Scenario 1: The Steady Income Seeker

Meet Dianne, a busy professional looking for passive income to supplement her retirement savings. She has $100,000 to invest but limited time to manage her investments. For Dianne, a portfolio of performing notes might be ideal. She could purchase several performing notes, each yielding 8-10% annually, providing her with a steady monthly income without requiring much hands-on management.

Scenario 2: The Value-Add Investor

Now consider Mike, a former real estate agent with experience in property management and negotiation. He has $50,000 to invest and is willing to take on more risk for potentially higher returns. Mike might choose to focus on non-performing notes. He could purchase a non-performing note at a 50% discount to face value, work with the borrower to bring the loan current or negotiate a discounted payoff, potentially doubling his investment in a shorter timeframe.

The Hybrid Approach: Balancing Risk and Reward 

Who says you have to choose just one strategy? Many successful note investors maintain a balanced portfolio of both performing and non-performing notes. This approach allows you to enjoy the steady cash flow of performing notes while also capitalizing on the higher potential returns of non-performing notes. 

Consider starting with a mix of 70% performing notes and 30% non-performing notes. As you gain experience and confidence, you can adjust this ratio to align with your evolving goals and risk tolerance.

Next Steps: Turning Knowledge into Action

Now that you understand the differences between performing and non-performing notes, it’s time to take action:

1. Assess Your Situation: Reflect on your goals, risk tolerance, and available resources.
2. Start Small: Consider dipping your toes in with a single performing note to learn the ropes.
3. Educate Yourself: Attend workshops, join investor groups, and read extensively about both types of notes.
4. Network: Connect with experienced note investors to learn from their successes and mistakes.
5. Seek Mentorship: Consider working with a note investing mentor to guide you through your first few deals.

 Remember, there’s no one-size-fits-all answer in note investing. The “right” choice depends on your individual circumstances, goals, and risk tolerance. Whether you choose performing notes, non-performing notes, or a mix of both, the key is to start your journey with education and take consistent action.

Ready to achieve success in note investing? The best time to start is now! Take advantage of the resources below to learn from industry experts, connect with a thriving community, and unlock your full potential in creative real estate financing.

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