Hey Reader,

A small note does not always mean an easier investment.

I recently had a paperwork issue that required an attorney to step in and resolve it.

The legal bill was $1,470.

That is the part of a small balance note that people do not always think about.

Whether the note balance is $20,000 or $80,000, an attorney still has to review the documents, figure out what needs to be corrected, communicate with the right parties, draft or revise documents, and make sure the fix is legally sound.

As a practical rule, I would expect a relatively straightforward paperwork issue to potentially cost several hundred to a few thousand dollars in legal fees. More complicated title, assignment, lien, or contested issues can cost considerably more.

Now look at what a $1,470 expense does to the economics:

On a $20,000 note, that is already 7.35% of the investment.

On an $80,000 note, it is about 1.84%.

Same attorney.

Same paperwork problem.

Very different impact on your return.

That is why I am careful with small balance notes. The yield can look incredible on paper, but your underwriting needs to leave room for the expenses that show up when everything does not go perfectly.

Before buying a smaller note, ask yourself:

If I suddenly had a $1,500 to $3,000 legal problem, would this deal still make sense?

That question can save you from buying something that only works when nothing goes wrong.

I’m breaking down more of the real numbers, risks, and decisions behind note investing during my next webinar on October 20 at 1pm CT.

​Register for the live webinar​

Sierra

Educational content only. Personal investment examples are shared for illustration and do not constitute investment, tax, legal, or financial advice, or an offer to sell securities.