Mortgage Note Investment | An Overview
Mortgage note investment or real estate note investment is a real estate investing strategy that might be appealing to beginner real estate investors for its obvious simplicity compared to buying a rental property.
Most newbie investors in the real estate business start with a traditional method like rehabbing or buying and holding single-family rentals. They might also invest in commercial real estate like apartments, storage, or strip malls, too.
Depending on how you manage the assets, these methods of investing can be great ways to generate income, receive tax benefits, and build wealth — but they aren’t the only ways.
Mortgage notes are an alternative advantage category within active real estate investing. They have many benefits and present unique opportunities. They also earn higher-than-average returns for real estate investments.
What Is A Mortgage Note?
Mortgage notes, or real estate notes, are legal documents that describe a loan and create an obligation for it to be repaid. It is a document that ties real property to the note as collateral for the loan. A note defines how much money was borrowed by whom, from whom, and it defines the terms of the borrower-lender agreement. For instance, it states a time frame for repayment and the rate of interest to be collected by the lender.
What Is Mortgage Note Investment?
Real estate investors make money with mortgage note investing through buying mortgage notes from lenders who no longer want them. Essentially, they purchase the debt. As a result, the investor is able to collect mortgage payments and interest much like banks do.
When you buy a mortgage note and mortgage, you’re buying the debt that remains to be paid on the note, secured by the asset outlined in the mortgage. You’re not buying the property — you’re buying the debt and secured interest in the property.
Essentially, a note buyer steps into the shoes of the bank. You can now collect the remaining debt on the note and receive the monthly payments. You can also take legal action to regain title in the event of default.
While many loans are bought and sold at full price, some can be bought at a discount. If the loan is nonperforming, or the note holder needs to sell the note badly enough, they may be willing to part with it for less.
Benefits of a Mortgage Note Investment
The benefits of a mortgage note investing are definitely attractive and some real estate investors are able to make this method work for them.
With mortgage note investing, you can reap the following benefits:
- Truly passive income (you don’t have any of the hassles of maintaining an investment property).
- The chance to help homeowners retain their property by being flexible with terms.
- Lower on-going expenses (most investors hire a servicer to handle the note for a small, usually $20-$50 monthly fee).
- A potentially higher return on investment, as you can negotiate your own interest rates.
Disadvantages of Mortgage Note Investment
On the other hand, mortgage note investing is a risky business that is not suitable for most people who are looking to get into real estate.
Some of the downside to real estate note investing include:
- There’s always a risk that the borrower will default. As with all credit investments, the danger is that the borrower will stop making payments.
- It is difficult to determine the profitability of a particular note investment because there are too many variable factors. Unfortunately, an investor cannot determine this factor before purchasing a mortgage note.
Investing in real estate notes is generally the purchase of an existing mortgage. And when you purchase a mortgage note, you become the lender. You have all the rights of the lender. You don’t own the real estate, but you have a right to take the collateral if the borrower doesn’t pay.
Whether you’re curious about investing in notes yourself or partnering with a private investor such as Mikk Sachar here, we are always willing to jump on a quick call to help point you in the right direction.
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