You’re ready to leverage the power of real estate investing to build passive income streams. You’ve learned from our videos and articles that Note Investing partnership or a fund is a great way to do this. 

We agree, naturally, and would love to help you learn more about this strategy or maybe even partner with you. 

However, we also know that Note investing isn’t right for everyone. 

Investing in Notes, especially Non-Performing Notes can provide great returns, but that may not be your primary investing goal. And it is easy to get caught up in all the benefits of any one type of investing strategy.

We challenge you to think about why you SHOULDN’T invest in Notes. This is a question you should always ask any potential partner or operator before joining an investing opportunity.

5 Reasons You Shouldn’t Invest In Notes

We have seen 5 primary reasons that someone would not want to invest in Notes. They are:

1. Earnings are taxed as regular income.
2. Your capital is illiquid for 1-3 years.
3. Require capital (perhaps a large amount)
4. You have to learn about a new real estate investing strategy
5. Notes don’t use leverage

Different Real Estate Investments For Different Goals

Before we dive in deeper to explain each reason, we always promote a diversified approach to any investing strategy. We rarely see a successful real estate investor who got there by using a single asset class or a single strategy. 

This doesn’t mean that focusing on one thing is bad. In fact, it is focusing on one thing at a time that works here. Once you are receiving the benefits of new investment, it may be time to learn about a new opportunity that can complement your current strategy.

No real estate investment vehicle is perfect. But each one could help you reach each of your goals.

Reason 1: No Tax Benefits

The first reason that Note investing may not be your primary strategy is that your earnings will be taxed as regular income.

There aren’t tax breaks for owning Notes like there are when you own a rental property. Just like your earnings from stocks in a brokerage account, you will pay income tax. There is no depreciation or cost segregation that would lower your taxable income. Since the paper is the asset here, we can’t claim tax breaks from the physical building (even though it is our securing collateral). 

The exception to this is when Notes are bought inside a self-directed retirement account. Using this type of account will prevent you from taking advantage of any tax breaks since the account is sheltered from taxes. 

Notes may be the best real estate investment to use with a self-directed retirement account for this reason. You wouldn’t be able to take advantage of those tax breaks away. 

Of course, you should always consult your CPA and lawyer for the final say on how a Note investment might impact your income.

Reason 2: Capital is Inaccessible For Duration of Note Investment or Partnership

The second reason you shouldn’t invest in Notes is that you can’t take your money out whenever you want it. 

Our partnerships hold assets for about 1-2 years, sometimes a bit shorter or longer. During this time, you won’t be able to liquidate your capital. You agree to the terms and projected hold time and plan to have your money invested for the duration of that hold time. 

If there is anything about the idea of investing $100,000 and not having access to it for at least 2 years, then this isn’t the right wealth-building strategy for you.

Standard rental properties work the same way. You typically hold them for many years to avoid paying fees, capital gains, and more. You typically also go for appreciation to increase the value of a rental property and increase your return. The longer you hold, the greater the appreciation.

With Notes, we don’t need to wait for market appreciation. We can force appreciation by purchasing the asset for less and adding value by helping the Note to re-perform. But you still can’t take your money out whenever you want.

Reason 3: Notes Require Capital

The third reason you may not want to invest in Notes is that you have to put in a lot of money. 

The minimum capital amount for our partnerships or funds is $50,000 at the time of publishing this article. This is a lot of money for anyone and should be used wisely. 

Look at all the things you need and want, as well as your overall finances and goals. Are you also hoping to put down a sizeable down payment soon, or buy a car? Or, if this is your only $50,000 definitely do not invest it. Instead, think about putting it into an emergency savings account and then growing your investment bucket. You want to be absolutely sure that you are ready to invest that money.

Reason 4: You Have To Learn About A New Strategy

Reason four to not get into Note investing is because you don’t want to learn about another investing strategy. 

Perhaps you have already learned about bitcoin, or how to buy rental properties out of state. Or you have studied how to vet an apartment syndication offering. Note investing is different and requires you to learn a new process. 

You’ll want to understand this asset class and how to vet a potential partner before deploying your capital. If you join a partnership or fund, you won’t have to spend much time after your funds are transferred, but you do need to know what you are getting into first. 

If you see the potential in this investing strategy, you’ll spend less time with every subsequent investment. With shorter capital hold times, you will also have your returns sooner and need to reinvest that money sooner. Which is a good thing, but does require some of your time.

Reason 5: You Aren’t Using Leverage

The final reason to not add Notes to your portfolio is that you have to aren’t using leverage. 

Many real estate investors love the idea that they are leveraging the power of financing to build wealth. This happens because tenants pay down the mortgage debt every month for you with rental houses or multifamily investments. For some, this is a non-negotiable element of building wealth. 

However, we encourage you to compare yields, or returns, rather than having specific criteria for your investments. If you can use leverage on a rental property and get an 8% return on your investment each year or you can deploy the same amount of capital in a Note and get 12% return, which is better?

Note Investing Can Build Wealth

Notes can be incredible tools to build wealth. We always recommend a diversified portfolio and believe that Notes can fit into most investor’s strategy who like the shorter capital hold time, great returns, and a minimal amount of your time. Notes can help amplify your progress toward your goals. 
But no investment vehicle is perfect. You have the power to decide the best strategy for your own goals. Join our Investor Circle to learn more about Notes and to jump on a call with us. We’ll talk about your investing goals and any questions you may have to see if a Note partnership or fund may be right for you.