In an environment where interest rates are at historic lows, it is becoming increasingly difficult to find investments with high yields. Fixed income investments are not attractive due to plummeting bond yields. In contrast to owning a property completely and having tenants, investing in mortgage notes offers an appealing alternative.
However, when you secure a mortgage note, you do not own the property like you would with a hard real estate purchase. Through this process, you take over the place of the bank in the transaction and become the borrower’s new creditor.
Investing in mortgage notes can be a great way to generate passive income without having to purchase a physical property. Payments for principal and interest on the mortgage will provide you with a monthly income If you want to resell the note after it matures, or if you wish to hold it until maturity, this is an option you can consider.
Table of Contents
What is Mortgage Note Investing?
An investor who buys notes purchases a debt instrument and the guarantee associated with it. The lender will eventually become the investor if you decide to invest in mortgage notes. Once the original borrower has made the loan payments, you will collect payment from them. Notes are typically purchased at substantial discounts by investors.
Defaulted loans can also be sold by lenders and investors. Foreclosure proceedings are generally avoided through this method because they are labor-intensive and expensive. Non-performing mortgages are referred to as such.
By modifying the terms or foreclosing on the loan, investors hope to make bigger profits on non-performing notes bought at a discount.
How Do Real Estate Mortgage Notes Work?
Real estate transactions usually involve a promissory note known as a mortgage note. A promissory note serves as a guarantee that the borrower will repay the lender. These mortgage notes are legally enforceable even if they are not considered public documents.
Lenders hold the loan documents until the borrower makes the final loan repayment after the borrower signs the required documents. Despite this, a lender can put the note up for sale in the secondary market while the loan is outstanding in order to recover some of the money.
Performing vs. Non-Performing Notes
Non-performing notes differ from performing notes in a very simple way. Borrowers who make their payments on time have performing notes. Defaulted loans, on the other hand, are non-performing notes.
The benefits of investing in non-performing notes make them a relatively promising investment, despite their counterintuitive nature. Regardless of whether they are worth a little or nothing at purchase, modifying a note through reselling it or through foreclosure can offer substantial profits.
You should be prepared, however, if you’re considering this route since it’s a lengthy and complex process.
Benefits of Mortgage Notes Investing
When it comes to investing in real estate notes, there are numerous benefits for investors. The first thing to keep in mind is that real estate mortgage note investing can be an extremely profitable investment if done well.
Through investing in real estate notes, you get the same benefits that you would get if you were the bank, without having to deal with landlord hassles. In addition, your investment is collateralized with a lien that acts as a security.
Here are a few reasons why you should consider investing in notes over other real estate assets, and why they might be more useful.
Property Management Isn’t Necessary
Real estate can be a lucrative source of cash flow for investors, but managing properties for rent can be exhausting. Having someone else manage the property while you receive the income is the benefit of being the lender.
Tenants Do Not Need to Be Managed
The homeowner must pay the mortgage or you will lose the house through foreclosure, whereas rental property owners are concerned about vacancies in their rentals.
Secondary Market Liquidity
There is a high demand for mortgage notes in an active secondary mortgage market, which allows investors to exit real estate with no sales expenses or opportunity costs.
An Attractive Discount
It may be the discount at which buyers can purchase mortgage notes that makes investing in mortgage notes so attractive. Capital protection is increased when discounts are provided, as well as higher yields and profit margins when they are repaid.
Strategies for Investing in Mortgage Notes
There are differences between each note. Flipping notes can sometimes be a quick way to make cash.
A modification of the loan with the existing borrower might be more advantageous or suitable in other circumstances. The monthly payments may be collected right away in some cases.
Mortgage Notes Flipping
Investing in mortgage notes is often a way for investors to make a quick buck by making wholesale purchases so they can sell them closer to retail.
The right lender can sell you a tape of high-quality loans at a good price that you can resell to other investors and make good money. It is important to build solid relationships with the sellers of tapes of notes before purchasing them from them.
Mortgage Note Renovation
A majority of non-performing note investors will attempt to recondition and resell your note with new terms as a performing note. Similarly, a note investor will attempt to make any repairs necessary to a note, just as a real estate investor would do to a property.
By modifying the loan terms with the borrower, this note investment strategy involves investing in notes. Time-consuming and difficult, this process usually takes a lot of effort. It’s a situation where people might lose their homes.
Own or Sell the Real Estate
You often have difficulty modifying non-performing mortgage notes with existing borrowers when purchasing non-performing notes. Your ability to reach them may be limited, they may be uninterested in negotiating, or both of you may have trouble reaching an agreement. A real estate sale or acquisition will most likely be your only option.
Regardless of how you do it, you can have difficulty exiting a real estate note investment. To accomplish the job profitably, be prepared to give your time and resources.
How to Invest in Real Estate Notes?
Notes can be purchased for real estate in a relatively easy and straightforward manner. If you want to purchase your note using individual retirement account (IRA) funds, equity, or personally provided funds, you can do so.
You may purchase the note in installments or in full depending on the lender, and most lenders require an income statement.
The secondary mortgage market has an active market for both performing and non-performing notes. To purchase notes, you can call on banks, build partnerships with private equity firms and brokers, or reach out to individuals. Notes are best found on online exchanges, for simplicity’s sake.
Get more information about investing in mortgage notes and other investment opportunities when you invest now with Saint Investment Group. Contact us at 949-881-7128 at Saint Investment Group today!
President of Saint Investment Group
Nic is a two decade seasoned expert in investing and capital raising, specializing in Real Estate and debt markets. With Saint Investment Group, he leads large-scale distressed asset purchases and innovative syndications for investors.