Note Investing
Before you jump in and sign up for training, take time to view the webinar above. It will provide an overview of the course and help you understand the basics of what note investing is all about.
What is a note?
The note is a promissory note. It is a promise to pay or an IOU. It’s a written agreement between the borrower and the lender that specifies the terms of the loan. Most people are familiar with notes on the consumer side. If you financed a car, you had a car note. In many cases, people are financing their cell phones and have a cell phone note. If you ever purchased a house or a property, then you had a mortgage note.
What is mortgage note investing?
Mortgage note investing is you becoming the bank. It is a form of investing that allows an individual or entity to purchase mortgage notes from the bank, hedge funds, online sources or from other note investors and you begin collecting the monthly mortgage payments. By investing in these mortgage notes, you are buying the debt that is secured (or tied to) the underlying asset or the property. Generally, these notes are purchased at a discount of the remaining balance on the loan. For example: You may be able to purchase a mortgage note that has a remaining balance of $60,000 for $48,000. The borrower has to pay you the $60,000 plus any interest attached to the note in monthly installments until the loan is satisfied.
Why do people invest in notes?
- Passive Income: It can truly be passive income. You have to put work into finding the asset and performing due diligence. In some cases, you may need to work with a lawyer and servicer, but you are paying them to do the work. You don’t need to communicate with the borrower, run escrow reports or send out late payment notices. Your servicer works on your behalf to do that while you collect the monthly payments.
- No landlording: Forget the toilets, tenants and termites. Also forget the late night calls. The borrower is responsible for the upkeep of their house. You are the lender, not the landlord (so you become the lienlord).
- Strong returns: 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.
- Cash flow: You can fund your retirement account, your child’s college fund or your checking account with steady monthly payments.
What note investing is not
- Hard Asset: You are not purchasing the property. You are purchasing the paper. You could end up with the property if you have to foreclose, but as a note investor, you are not purchasing property.
- Easy way to get a house: It is not a method to kick people out of their homes so you can flip or rent the property. These are people’s homes and they have invested their time and money into them. If they are paying on time and satisfying the contract, then you cannot go in and kick them out.
- Get rich quick: It is not a get rich quick scheme. You can become financially free, wealthy and build up your retirement, but like all other investments you build and grow to reach your goals.
- Risk free: It is not risk free. Like all investments, if you do not perform your due diligence, then you can run into a lot of trouble.
How is this different from real estate investing?
Great question. The difference in real estate investing and note investing is that in real estate investing you own the hard asset or have equity in a business that owns the hard asset. In note investing, you don’t own the property, you own the debt associated with the asset, or property. You deal with the paperwork associated with the loan, not the asset associated with the loan. If the borrower defaults — because you are the bank — you have the right to foreclose and take the property back. At that point in time you then take ownership of the property. Until then, you have no ownership of the property, but you have rights to that property, should the borrower default on the contract (note).
How do I get started in note investing?
Get educated. The most important thing to do is get educated. This asset class is different from anything in the real estate investing industry and if you do not understand what you are doing, you could get into a lot of trouble. Some people will tell you to start wholesaling notes first (yes, you can do that), but there are many new note wholesalers that don’t know the basics and don’t talk to the talk. Because the note industry is small (but growing), the inexperienced one’s are quickly found out. Take time to review the free webinar and then make a decision if this is something you would be interested in pursuing. Then take the time to get educated, ask questions and get a mentor who will help you navigate your way.
