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A Complete Guide to Investing in Real Estate Mortgage Notes

A Complete Guide to Investing in Real Estate Mortgage Notes

More and more sophisticated investors are investing in real estate mortgage notes. Why is that?

How does this type of investment work? Are they right for your investment strategy? Where can you find the best loan note deals?

What Are Real Estate Mortgage Notes? 

When a real estate buyer or owner finances their property they give a mortgage lien and promissory note to their lender. 

Big banks have thrived on these investments for decades. It has been a big part of their investment strategy, which has allowed them to grow so large and cultivate so much power.

Owning the note and lien ensures that they will always get paid. If the borrower does not pay on time, then the note holder can foreclose and seize the property put up as collateral. They also make money from loan servicing and securitization or selling those debt investments. 

Why Invest In Them?

Experienced real estate investors and sophisticated investors of all types are eagerly trying to get into this space. 

Aside from the many other benefits of real estate investing, investors love the ease of management. It is far better than having to clean toilets or deal with tenants. The borrowers do all of the hard work. 

The note investors get income, truly passive income, and strong yields while enjoying the tangible security of real estate as collateral. 

Mortgage Note Investing Strategies

There are actually a variety of mortgage note investment strategies. 

These include:

  • Buy and hold for income and long term real estate investing
  • Acquiring non-performing or underperforming loan notes and fixing them
  • Flipping mortgage notes
  • As a channel for back door deals and acquiring the underlying real estate
  • Originating loans 

What’s Most Important When Investing In Mortgage Notes? 

To be a successful, active investor in mortgage notes on the front lines, you need to know what makes them valuable or can detract from their value.

Things such as how different types of notes are traded and priced, how to conduct thorough lien searches, and what types of notes are most in demand. 

This is a highly regulated asset class. Meaning that you need to understand the laws of mortgage servicing. You don’t want to jeopardize your assets with the wrong types of notices or communications at the wrong time. 

It also pays to have a good team in place. Including those that are experienced in workouts and managing borrowers for optimal performance. 

Where Can I Find The Best Mortgage Notes To Invest In?

When mortgage note investing first really became accessible to regular investors, it was relatively easy to go to banks and buy a couple of notes, or even to become a hard money lender yourself and create your own inventory. That has changed a lot.

Today, note sellers are under a lot more pressure to vet buyers and ensure they aren’t taking on extra liability from who they sell to. The best discounts on loan notes are also in bulk and larger pools. This means buyers must have a strong capital position, and a clean track record of strong management to get access to them.

The hack here for regular investors is to partner with these established buyers or to invest through a fund to enjoy the rewards and passive income while letting the experts do all the hard and complicated work.