Investing in mortgage notes can be a profitable way to diversify your portfolio and generate passive income. However, not all opportunities are created equal. It’s essential to carefully evaluate each investment opportunity and assess its potential upside and downside before making a decision.
One of the most common mistakes that investors make is chasing marginal opportunities. These are investments that offer a small potential upside compared to the potential downside. While the potential gains may seem tempting, the risks involved may not be worth it.
For new investors, it’s essential to remember the importance of patience and discipline. I have certainly been guilty of lacking patience and been a bit too eager to jump in on investments that I should have passed on. Investing in mortgage notes can be exciting, and it’s easy to get caught up in the potential gains. However, it’s important to approach each investment opportunity with a level head and a long-term perspective.
Patience and discipline are not only important when evaluating investment opportunities but also in calculating your risk tolerance. Risk tolerance refers to the level of risk an investor is willing to accept in their investments. I find mapping out the possible scenarios or outcomes for the asset is very helpful in calculating risk tolerance, as it can help you make informed investment decisions that align with your goals and risk profile.
If you have a long-term investment horizon, you may be willing to accept more significant risks to achieve higher potential returns. On the other hand, if you have a shorter time horizon, you may want to focus on more conservative investments to protect your capital. To illustrate this point, let’s consider an example. Suppose you are presented with an opportunity to invest in a mortgage note that offers a 5% annual return. On the surface, this may seem like a good investment, but when you dig deeper, you find that the property securing the note is in a declining neighborhood, and the borrower has a history of late payments. In this scenario, the potential downside may far outweigh the potential upside.
Instead of focusing solely on the potential gains, it’s essential to consider the potential risks. When evaluating an investment I ask myself, “What can go wrong?” rather than “What can go right?”. It is always easy to see what can go right when I am eager and not practicing patience.
When evaluating an investment opportunity, I like to consider the worst-case scenario. You should ask yourself, what if the borrower defaults on the loan? What if the property value decreases significantly? By answering these questions, you can gain a better understanding of the potential risks involved in the investment. I always find that when I am fully informed, it boosts my confidence which in turn boosts my patience level, and I am able to wait for the right opportunity.