Mortgage Note Investing: Are Bigger Or Smaller Note Pools Better?

Jul 29, 2021

Are larger or smaller pools of mortgage loan notes better investments?

New solo and DIY investors may be relegated and limited to trying to find individual properties and loan notes to invest in. Accredited investors and funds have more choices. 

Of course, what’s large and small can vary by opinion too. A $20M pool of 80 mortgage loans being sold by Fannie Mae may be considered very small. For others $5M or $10M may seem large. 

The Pros & Cons Of Acquiring Large Loan Note Pools

The most obvious and perhaps significant benefit of acquiring larger pools of mortgage notes is the discounts and pricing. 

Agencies and huge institutions can offer much deeper discounts to move larger pools. It is more efficient and profitable for them. Especially, as their overhead for executing on transactions can be far higher. From this perspective, the fewer transactions they have to do the better.

The offset here is that the quality and mix of notes can be incredibly varied at this level. There can be a broad mix of loan performance levels. The underlying real estate collateral can be spread all over the map in different states. The acquirer just has to take this in stride. 

The level of organization and due diligence is notably different with the larger organizations which sell these sized pools. They have to be much more selective in who they sell to in order to protect themselves from liability. 

This also means access to acquiring these pools is far more limited. They are looking at resumes, performance track record, financials, and what you intend to do with these loans. 

Most investors will never get access to these levels of deals and discounts unless they participate in a fund or partnership with others.

The Pros & Cons Of Acquiring Smaller Loan Note Pools

The discounts on smaller note pools may not be as attractive. Though this can vary widely, and may significantly depend on the strength of the buyer. 

Any sacrifice made on pricing of smaller pools may also be made up for in clarity and efficiency in acquiring more targeted assets. 

For example; smaller pools are more likely to have tighter rate spreads, more similar loan performance, and may all be within one preferred geographic area. This may make them easier and more efficient to manage, and ultimately more profitable. 

Smaller pools may be more readily available, and the sellers may present more negotiability than dealing with the likes of Fannie Mae or JP Morgan. 

Which Type Of Note Pools Are Best?

While the largest pools are often prized by investors for their discounts, more modest batches of loan notes may be wiser in more uncertain times. It gives you more control over what you are investing in. Your share of the profits also makes a difference. If a fund you are investing in is buying pools at 40 cents on the dollar, but only gives you a 4% return, then a well managed fund that may pay a little more on the acquisition, but which gives you a fixed 9% or better return is still better for your money. 

Much of this is about market timing. There are times when focus and targeting is more important than others for investing safely and sustainably. The same applies to bricks and mortar, and acquiring pools of REOs and portfolios of income properties too.

Investment Opportunities

Find out more about investing in secured debt and real estate, go to NNG Capital Fund

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