The Battle of Investment Strategies: Rentals vs. Notes
In today’s challenging real estate market, investors are constantly searching for strategies that maximize returns while minimizing stress. Joe, a seasoned instructor at NoteSchool, presents a compelling case for why the traditional rental model is being outperformed by seller financing notes in nearly every metric that matters to investors.
“By changing from the rental model to the note model, what do you make? Two to three times the returns with no stress.” – Joe, NoteSchool Instructor
The Rental Property Challenge
For decades, rental properties have been considered the gold standard for building wealth in real estate. Buy a property, find a tenant, collect rent each month, and watch your asset appreciate. It sounds simple and effective. However, the economic landscape has shifted dramatically in recent years.
According to data presented by NoteSchool and confirmed by Zillow Rentals’ survey of over 731,000 properties, while rental income has increased by approximately 20% over the past five years, expenses have skyrocketed by 50-100% during the same period.
The industry standard “50% Rule” in real estate investing states that half of your gross rental income should be allocated to operating expenses – and that doesn’t include your mortgage payment. With insurance rates climbing, property taxes increasing, and maintenance costs soaring, many landlords are finding their cash flow significantly squeezed.
A Real-World Comparison
Let’s examine a typical rental property scenario using NoteSchool’s analysis:
Traditional Rental Approach:
- Property Value: $250,000
- Monthly Rent: $1,800
- Operating Expenses: $900 (50% rule)
- Net Monthly Income: $900
- Annual Return (Cap Rate): 4.3%
In contrast, the same property using NoteSchool’s seller financing strategy yields dramatically different results:
Seller Financing Approach:
- Property Sale Price: $250,000
- Down Payment Received: $37,500 (15%)
- Seller-Financed Amount: $212,500
- Interest Rate: 10.5%
- Monthly Payment Received: $1,943
- Net Monthly Income: $1,943 (no expenses)
- Annual Return: 11%
The difference is striking – an additional $1,043 in monthly cash flow with none of the headaches of property management, maintenance, or tenant issues.
The Long-Term Financial Impact
Over a 30-year period, the contrast becomes even more dramatic:
Rental Property Total Income (30 years):
- $10,800 annual net income × 30 years = $324,000
Seller Financing Total Income (30 years):
- Down payment: $37,500
- Annual income: $23,316 × 30 years = $699,480
- Total: $736,980
That’s a difference of $412,980 over 30 years – without factoring in the stress of managing properties, dealing with tenant issues, or handling unexpected maintenance costs.
“This house will never be worth $736,980. It should make more than sense – it should make dollars.” – Joe, NoteSchool
Why Seller Financing Works in Today’s Market
NoteSchool has identified a critical gap in the current lending landscape. While banks have tightened their lending criteria, there exists a significant population of “just missed” buyers – people with good credit and substantial down payments who simply don’t fit the traditional lending model:
- Self-employed professionals
- Real estate agents working on commission
- Contractors
- Gig workers
- Entrepreneurs
- 1099 income earners
These buyers are willing to pay premium rates (9-12%) because the alternative non-qualified mortgage (non-QM) loans come with similar rates plus points. Meanwhile, as a note holder, you maintain security through a substantial down payment and first position lien on the property.
The NoteSchool Strategy in Action
The beauty of the NoteSchool approach lies in its simplicity and effectiveness:
- Target the right buyers – Use platforms like Facebook Marketplace with specific language: “Private financing to deserving buyer with large down payment”
- Secure your investment – Collect a substantial down payment (15-20%) to create an equity cushion
- Create passive income – Set up the note with a third-party servicer who handles all payment collection, including taxes and insurance
- Eliminate stress – No more tenant calls, maintenance headaches, or property management worries
- Maximize returns – More than double your investment return while reducing your time commitment
Protection Against Worst-Case Scenarios
One common concern about seller financing is: “What if the borrower stops paying?” NoteSchool addresses this by highlighting three possible outcomes:
- The loan pays off over 30 years as planned
- The borrower refinances or sells, paying off the note early
- The borrower defaults
Even in the default scenario, after collecting the substantial down payment and several years of payments at an 11% return, the note holder maintains a strong equity position. The foreclosure process ultimately returns the property to the investor, who can then repeat the process with a new buyer.
Applying This Strategy to Various Real Estate Types
While this example focused on a single-family home, NoteSchool emphasizes that seller financing works across virtually all real estate assets:
- Multi-family properties
- Office buildings
- Storage facilities
- Commercial land
- Residential lots
- Country land and ranches
- Shopping centers
This versatility allows investors to diversify their note portfolio across different asset classes while maintaining the same passive income advantages.
The NoteSchool Difference
What sets NoteSchool apart is their systematic approach to teaching these strategies. Through their monthly two-day classes (available both virtually and in-person in Dallas), students learn the specific techniques for:
- Finding the right properties to convert to notes
- Marketing effectively to qualified buyers
- Structuring deals for maximum security
- Setting up proper loan servicing
- Managing the note investment for optimal returns
Ready to Transform Your Real Estate Strategy?
If you’re tired of the growing expenses and headaches of rental property management, NoteSchool’s seller financing approach offers a compelling alternative that can potentially double your returns while eliminating property management stress.
To learn more about implementing these strategies in your real estate portfolio, check out our Smart Investor’s Guide to Converting Rentals to Seller Financing.
