The Basics of Note Investing in a Nutshell

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Ultimately, note investing is you becoming the bank.

Whenever I mention note investing, people usually ask “what’s that?” My response…In a nutshell, note investing is you becoming the bank.

Note investing is a passive form of investing that allows you to purchase mortgage notes from the bank, hedge funds, online sources and other investors and then you start collecting the monthly payments. In a nutshell, note investing is you becoming the bank.

What is a note

A note is a promissory note. It is a written agreement between a borrower and a lender that specifies the terms of a loan. The document generally includes borrower information, amount of the loan, and the interest rate. The note also includes the date of repayment and any other pertinent information.

What is note investing

Investing in notes is buying debt that is secured by the underlying asset or the property. When you buy a note, you are buying the rights to the payments that are made on that debt. Generally, these notes are purchased at a discount of the remaining balance on the loan. For example, you could purchase a note that has a remaining balance of $50,000 for $42,500. The borrower still has to pay you the $50,000 plus the interest attached to the note. This is how note investors see higher returns on their investment.

Why people invest in notes

It’s truly passive income
When you purchase a note, you hire a servicer to manage the note while you collect the monthly payments. You don’t have to communicate with your borrowers or run escrow reports or send out late payment notices. Your servicer works on your behalf to do all of that while you collect money.

No landlording

Avoid the three “Ts” – tenants, toilets and termites. Many tired landlords are jumping into notes to avoid the late-night phone calls, problem tenants and policies and regulations that favor tenants. With note investing, the borrower is responsible for the upkeep and maintenance of the property because it is their property.

Still make money when the market fluctuates

Real estate prices often follow trends where they go up and down over time. For note investors, there are opportunities when the market is up and when it is down. Mortgages are bought and sold daily no matter what the economy is doing.

You are positioned to help people

When the market crashed in 2008, it was note investors who had the ability to help those who were underwater to stay in their homes. As the small bank you have the ability to work with borrowers on a level that larger banks cannot. In some situations when a person falls on hard times, the big banks move in and foreclose. As the individual bank, you can work with them in ways the big banks cannot in order to keep them in their homes and help them fulfill the American dream.

The benefits of note investing

  1. Notes offer a high yield and sometimes higher than traditional real estate investments.
  2. Notes are a conservative investment because they are backed by real estate and collateral.
  3. There is no management required with notes, which can free up time for other investment opportunities.
  4. Provides steady cash flow. You can put them into a self-directed IRA or an education account.

How to get started in note investing

Get Educated. The most important thing to do is get educated. I cannot express enough that this asset class is different from anything in the real estate investing industry. If you do not understand what you are doing, you could get into a lot of trouble. 

I realized that I needed to get educated and I shouldn’t do it alone. Even though I did all the research when it came to note investing, I still needed a mentor. If you’re looking for someone to assist you in getting started with note investing, check out our webinar and training. If you have any questions contact The Pier Harbor Group today!


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