Notes On FIRE

Achieve Financial Independence through Note Investing

The Importance of Cultivating Hobbies

My father in law recently got his green card and has been staying with us the last 2 months.  He’s a great guy and always friendly and good-natured.  We love having him here, but he also acts as a living, breathing warning sign about what life might be like when we get older, especially if both my wife and I don’t make it to old age together.

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The F-Word of Note Investing – Foreclosure

I really like note investing, but it’s important to spend just as much time talking about what happens when things don’t go as planned as when they do.  The obvious “thing that might not go as planned” is that the borrower might just simply stop paying their mortgage.  If you are buying 1st performing notes with a reasonably good payment history, like I am, this is not the norm…but it does happen.  I am currently going through a foreclosure on one of my properties now.  It’s not my preference to kick someone out of their home but ultimately they need to provide proof that they intend to keep up their end of the bargain.

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The Benefits and Drawbacks of Notes vs Index Fund Investment

The most common investment advice given on financial independence blogs is index fund investing.  To a large degree, I agree with this advice.  Index fund investing is completely passive, easy to access if you need to sell some shares to make a purchase (or pay your bills) and over the long term they can provide a reliable return.  I personally have about half of our savings in index funds, and the other half in notes.  Let’s compare the major differences between note investing and index fund investment.  (Some of these will be repeats from the Notes vs Real Estate posts).

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How to Find a Note to Buy

If you understand what a note is, have read the pros and cons, and are ready to dive in…the logical next step is to start looking for a note to buy.  I’ll go over the method I use first and then discuss a few alternatives.

 

There are several online note marketplaces but one of the largest is FCI Exchange.  They are part of the same company as FCI Lender Services, which is the largest note servicing company.  I like them because they are backed by a reputable company, they have a good transaction portal that lets you go step-by-step with the seller and their administrators, and many notes are already being being serviced by FCI.  If I buy a note that is already serviced by FCI and intend to keep using them for servicing (as I do for most of my notes), the transition is much shorter and smoother than if I were to transfer the note to another servicer.

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Performing vs Nonperforming Notes

One of the key distinctions between different notes is weather the note is considered performing or non-performing.

 

Performing

Generally you can think of a note that is performing as one where payments are being made on a regular basis.  Lots of people in the industry use different cutoffs for how late a borrower could be, but it’s generally around 60 days late.  If you buy a note that is said to be performing you should still take a very close look at their payment history.  The risk of a “performing” note where most payments have been made within 5 days of their due date is much less than a note where payments are regularly a full month+ behind.  Nonetheless, if you are looking for only the least risky, most passive investments, the Performing status should be one of the first things you look for.

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