Note Investing: The Buy and Hold Strategy
Buy and Hold Strategy critical to develop your knowledge as a note investor because every note is different. You need a lot of tools in your tool belt to be able to approach different borrowers with different circumstances effectively.
It’s critical to develop your knowledge as a note investor because every note is different. You need a lot of tools in your tool belt to be able to approach different borrowers with different circumstances effectively.
Let’s first start by defining an exit strategy. An exit strategy is simply a plan that is executed by an investor to liquidate a position in a financial asset once a specific predetermined criterion has been met. As I see it, there are three primary considerations when determining the optimal exit.
How do I maximize returns?
How do I protect myself from liability as a lender?
How do I find a win-win with other parties in the transaction?
Let’s jump right in and talk about the buy and hold strategy. In this strategy, I’m referring to loans that are already cash flowing at the time of acquisition. It’s essential to have a well-defined buy box that you generally stick to when buying notes.
What this means is that you have a specific set of loan characteristics that you buy, and you generally don’t deviate from that criteria. Buy and Hold is an excellent strategy for building what I like to call a money machine and also for passive income. And by that, I mean the interest income is collected each month, and it’s more of a set it and forget it type of approach. That doesn’t mean that you don’t monitor the investment, but the buy and hold strategy is less servicing intensive. You’re not doing much in terms of active collections like you would with borrowers in default. With the buy and hold strategy, you may own the loan for years. The borrower may even pay you off while you own it either because the mortgage fully amortizes and you get paid down over time, or maybe there is a balloon payment that’s made, and it results in a lump sum payment to you, or the borrower could refinance and pay you off. It’s very reasonable to expect double-digit returns with this strategy, and it’s a great way, in my opinion, to build wealth over time. One reason buying and holding performing loans is less popular among some individual investors is simply the inability to recycle capital when they hold the note long term.
Some individual investors also use a self-directed retirement account to buy notes, which is a great strategy. I frequently talk with investors, individual investors, especially, that say they’d like to build up their cash reserves and then buy and hold. That’s because they have limited funds initially, but until they accumulate more capital, they often find non-performing notes appealing because of the turnover aspect of work in the notes, which we’ll cover more shortly.
So let’s recap. A great exit strategy maximizes returns, limits liability, and creates a win-win for all parties involved. Buy and Hold is an excellent strategy for building a money machine and passive income. The Buy and Hold strategy can generate attractive double-digit returns.
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