How to Invest in Real Estate Mortgage Notes

What are real estate mortgage notes?

When a person wants to buy a property, but isn’t able to buy it all in cash, they are going to be asked to sign a mortgage and a promissory note by their lender. The buyer then must pay part of the purchase price as down payment, and pay for the rest of the mortgage over time with interest.

The promissory note or just called note, is a contract signed by the buyer guaranteeing they will pay the lender their money back.

What does it mean to invest in notes

To invest in these notes, you must purchase the debt and the security instrument that comes with it. As soon as you invest in a mortgage note, you become the lender. The lender has a personal stake in the home but they aren’t responsible for property management, and paying for taxes and insurance. However, the lender gets to collect Principal and interest (P&I) every month until the note is paid for.

When you are buying a mortgage and a note, you are buying the debt that remains to be paid on the note. Essentially, instead of buying the property, you are buying the debt and secured interest in the property.

Performing note vs. non-performing note

In the majority of cases, when a note is originated, the borrower will start making payments to begin paying off the note. This type of note is known as a performing note. If the borrower stops making payments for an extended period of time normally more than (90 days) the note becomes delinquent. In this case, the note is now also known as a non-performing note.

Risks of investing in real estate notes

  • The homeowner could default on the loan, meaning the investor’s money could be at risk. To help avoid this, review the borrowers credit history, income, and down payment contribution.
  • If the value of the house is going down significantly, this could lead to the borrower abandoning their home.
  • The investor might lose money if the house is auctioned off for less than they paid for the note.

Where to buy real estate notes

There are a couple of ways that you can buy real estate notes.

From a bank – Real estate notes can be bought from a bank. If you have some connection with a bank, you can ask them about their interest in selling their notes. But notes can also be bought online.

From online websites – There are a number of websites out there that allow you to invest in real estate notes, like Paperstac.

 From note funds– An additional way of buying notes is through note funds. When you contribute to a fund, your money is combined with other investors. With the the power of your combined investments, you are able to have a share of a group of loans from larger financial institutions.

Conclusion – When buying real estate notes, it is important to be careful, as there are risks. But, it comes with the relief of not having to deal with property management. Make sure to keep learning about real estate and other topics of investing to reduce the risk and maximize rewards.