Complete Guide to Note Investing

Guide to Note Investing

How to Invest in Notes Note Investing

Note investing is a real estate investment strategy for both beginners and advanced Investors. This is an investment in real estate without having the headaches of being an landlord or rehabbing a property. If you are looking for alternative real estate investment which offers both passive and active investment, you will want to learn more about real estate notes. If you are thinking what is a mortgage note, and why is there so much hype around being a mortgage note investor then we encourage you to read on. 

People who have been investing in real estate have probably heard of the term mortgage note being thrown around. What some of these real estate investors may not know is that you can own a mortgage note yourself and profit monthly from being a mortgage note holder.

What is the difference between a Real Estate Note and a Mortgage?

A note is simply a promise to pay your debt on your house. When any type of real estate is being sold, buyers will come across a promissory note, which defines the terms and agreement of the loan. The note will include the loan amount, percentage rate, the payment amount, and the timing of payment. In layman’s term it is an IOU that contains the promise to repay the loan. The note is then secured through a security instrument called a mortgage or deed of trust. The Security instrument now ties the note to the deed as a lien on the property as collateral.  

To simplify even further what a mortgage note is, we will be using an example to explain it. Let’s say you recently purchased a home, and you put down 20% and wanted to borrow 80% from a lender. That lender you are borrowing the 80% from is now considered your mortgage holder.  When reading your mortgage document you can see that the lender has the right to sell your mortgage to another lender. The new lender would be considered a mortgage note investor.  

If you have ever owned any type of property you may have already experienced a change in the mortgage lender. Some property owners may get a letter from your lender saying that from here on out you will be making your mortgage payments to another mortgage lender. This is due to your mortgage note being sold off to a new lender.

How do I get into the mortgage note game? 

So now that we have covered what a mortgage note is, let’s talk about how to invest in a mortgage note. You’re probably thinking to yourself  “how would I be able to buy a mortgage worth over $100,000”. The good news is, for those who are trying to get into the mortgage note space is that there are over millions of mortgages that are less than $50,000 in the United States. These Mortgages can be purchased at a discount, and give you instant equity! 

Mortgage notes are usually sold by banks and other lenders. For more information on how to purchase notes for sale either check out our Note Buyer’s Note Investing Journey or jump right in and register to for the JKP Training Series Note Investing 101.  JKP also offers Note Investing consultation . 

How does the discount work?

Let’s say a homeowner owes $40,000 on their mortgage, which would be their balance. If the lender decides to sell the note to a different lender, the new lender doesn’t have to pay $40,000 they may only pay $35,000 for the note, leaving the new lender with $5,000 in equity. The homeowners still have the mortgage of $40,000 even after the note has been sold. This provides the new investor a higher effective yield, than the interest rate of the note. This can lead to above average return on the note.

Note Investing FAQ — Common Beginner Questions

How do you make money investing in mortgage notes?

Two main ways. First, monthly cash flow — the borrower’s payments come to you instead of the original lender. Second, the discount — notes are often bought for less than the balance owed, so you can earn a strong yield or a profit when the loan pays off, gets sold, or the property is resolved.

Is note investing risky?

Every investment has risk, and notes are no different. The main ones are the borrower stopping payments, the property being worth less than expected, or a slow legal process if you have to foreclose. You manage that risk with due diligence — checking the payment history, the property value, and the paperwork before you buy.

How much money do you need to start note investing?

It varies a lot. Some non-performing notes sell for a few thousand dollars; performing notes on higher-value homes can run into six figures. Many beginners start with one smaller note, or partner with others to spread the cost while they learn.

What’s the difference between a performing and non-performing note?

A performing note is one where the borrower is paying on time — you collect steady monthly income. A non-performing note is one where the borrower has stopped paying — these sell at a deeper discount, and the investor works to get it paying again. Performing is simpler; non-performing can pay more for more work.

How is note investing different from being a landlord?

A landlord owns the property and handles tenants, repairs, and vacancies. A note investor owns the loan, not the building — no tenants to manage and nothing to fix. You’re the bank collecting payments, not the property manager.

Where can I learn more about Real Estate Note Investing in mortgage notes? 

Our Note Investing Journey Page,  provides you with a list of resources, education and information based on your Note Investing experience! For our new Investors, sign up for our Note Investing Training.  For more personalized questions we offer consultation calls that can help new and old investors with their mortgage notes. Schedule a Note Investing Consulting call through our website today and get in touch with our team to help you buy, sell, or consult on your mortgage note investing.