Jan 18, 2023

In the not-so-distant past, buying property and renting it out was an activity reserved for those who could afford to invest large sums of money. But now it’s becoming much more accessible and affordable for even small investors. Investing in real estate notes can be a fantastic way to participate in the housing market, assuming you have experience and time as well as a little bit  of money to invest, too. Read on to learn more about investing in real estate notes, understand the risks involved, and discover all that you need to know before putting your plan into action. 

Franklin D. Roosevelt- US President

When you’re considering purchasing real estate notes, you might be wondering what this actually means. Let’s take a look at the ins and outs of buying these types of assets. 

• What is a property note? It is the promissory document that the borrower signs saying that they will repay the lender the amount that was borrowed for the purchase, in a set amount of time and under certain terms. The promissory note is secured by a mortgage loan or contract for deed. In purchasing real estate notes the homeowner (borrower) pays the investor instead of the bank or original lender (traditionally a bank). These can also be referred to as mortgage notes, lien notes, or borrower notes.  
• Who issues property notes or how can you buy them? There are several ways to obtain real estate notes including buying directly from the bank, note exchanges, note brokers and organizations, online marketplaces, FSBO groups, real estate investor groups, real estate investment trusts and crowdfunding platforms.
• What are the disadvantages of purchasing property notes? Notes are not FDIC insured, instead they are secured by a property whose condition you have no control over. There will be legal fees to foreclose on the property if the borrower doesn't make timely payments and you may have to sue to get the money owed to you. Buying notes is not very regulated. You're not buying the property you are buying the debt that is left on the loan, that is secured by the asset. There is risk in the possibility of defaults. Buying notes is a long term commitment and there can be interest rate risks
• What are the advantages of purchasing property notes?  This can be a fairly low cost method to building passive income with a high rate of returns. Most notes are sold at discounted prices. There is no need to maintain the property, manage it or do traditional landlord responsibilities as this will all fall on the homeowner (borrower). You will get a monthly income that includes principal and interest. Notes are IRA friendly with rollover options. You can typically secure properties for less then their market value.
• What types of real estate notes can be purchased?  There are commercial and residential notes that can be found for sale. Preforming notes are harder to come by and mean that no loan payments have been missed. Non preforming notes can be found at a deeper discount and borrowers are between 30-90 days behind. Sub preforming notes mean borrowers are 29-60 days behind. There is also non conforming notes which just means they have unconventional terms.
• What to do when you are ready to sell a real estate note?  Find a reputable note purchasing company or sell it to another investor.

Real estate note investing is a growing niche in the real estate market. It allows investors to purchase real estate properties and lease them out again. You can also buy notes from other investors. This gives investors the right to sell their leased property to the new lessee, who has to pay a larger sum than what was initially agreed upon by both parties, when leasing it out again. 

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