If you’re looking to invest in real estate without the hassle of managing tenants, maintaining properties, or dealing with traditional real estate ownership, investing in real estate notes may be the perfect solution. Real estate note investing allows you to generate passive income by purchasing mortgage notes and collecting payments from borrowers. This strategy can offer steady returns, portfolio diversification, and a lower barrier to entry compared to direct property ownership.

In this guide, we’ll walk you through everything you need to know about how to invest in real estate notes, including the different types of notes, where to find them, and key strategies to maximize your investment.

What Are Real Estate Notes?

A real estate note, also known as a mortgage note, is a loan secured by real property. When a borrower takes out a mortgage to purchase a home or investment property, they sign a promissory note agreeing to repay the loan. Banks, private lenders, or other financial institutions often sell these mortgage notes to investors.

When you invest in a real estate note, you are essentially stepping into the shoes of the lender, meaning you collect monthly payments (including interest) from the borrower. If the borrower stops making payments, you have legal rights to the underlying property as collateral.

Benefits of Investing in Real Estate Notes

• Passive Income Potential – Earn regular payments without managing a rental property.
• Lower Capital Requirements – Some notes can be purchased at a discount, making them more accessible than buying real estate directly.
• Diversification – Spread risk across multiple notes rather than tying up capital in a single property.
• Potential for High Returns – Non-performing notes can often be acquired at a significant discount, offering opportunities for larger profits.
• Reduced Property Management – Unlike traditional real estate, investing in notes does not require landlord responsibilities.

Types of Real Estate Notes

Before diving into real estate note investing, it’s essential to understand the different types of mortgage notes available. Your choice of note will impact your risk level and return potential.

1. Performing Notes

• Definition: These are notes where the borrower is consistently making payments on time.
• Pros: Steady, predictable cash flow with lower risk.
• Cons: Typically more expensive to acquire because they are lower risk.
• Best For: Investors looking for stable passive income with minimal headaches.

2. Non-Performing Notes (NPNs)

• Definition: These are notes where the borrower has fallen behind on payments.
• Pros: Can be purchased at a steep discount, offering significant profit potential.
• Cons: Higher risk, as you may need to work out a loan modification or foreclose.
• Best For: More experienced investors who are comfortable navigating loan workouts or property foreclosures.

3. Seller-Financed Notes

• Definition: When a property owner finances the sale of their home and creates a note for the buyer.
• Pros: Often provides better interest rates than traditional bank loans.
• Cons: May require additional due diligence to assess the risk of borrower default.
• Best For: Investors looking for off-market deals with flexible terms.

How to Invest in Real Estate Notes

Now that you understand the basics, let’s go step-by-step through the process of how to invest in real estate notes successfully.

1. Choose Your Investment Strategy

• Do you want a steady income stream? Performing notes may be your best bet.
• Are you looking for higher-risk, high-reward opportunities? Non-performing notes can be profitable with the right strategies.
• Do you prefer hands-on involvement? You might consider negotiating seller-financed notes or working directly with borrowers.

2. Find a Marketplace for Real Estate Notes

There are several sources where you can purchase mortgage notes, including:

• Banks & Credit Unions – Some banks sell notes as part of their loan portfolio management.
• Mortgage Note Brokers – These intermediaries connect buyers and sellers.
• Online Marketplaces – Websites like Paperstac, NotesDirect, and FCI Exchange list available notes.
• Private Sellers & Investors – Some investors sell notes directly through networking and investment groups.

3. Conduct Due Diligence

Before purchasing a note, it’s crucial to evaluate its potential risks and returns. Key factors to analyze include:

• Borrower Creditworthiness – Check the borrower’s credit history and payment trends.
• Property Value – Ensure the real estate backing the note has sufficient value in case of default.
• Loan Terms – Review the interest rate, loan duration, and payment schedule.
• Lien Position – Determine whether the note is a first lien (higher priority) or a second lien (riskier but higher potential return).

4. Make Your Purchase

Once you’ve selected a note and performed your due diligence, the next step is acquiring the note. This typically involves:

• Negotiating a purchase price.
• Completing legal documentation.
• Transferring ownership through a recorded assignment of the note.

5. Manage Your Investment

After purchasing the note, your primary responsibilities include:

• Collecting payments – If it’s a performing note, you’ll receive monthly payments from the borrower.
• Loan servicing – You may hire a loan servicing company to handle collections and paperwork.
• Workout Strategies – For non-performing notes, consider restructuring payments, modifying the loan, or foreclosing if necessary.

What Is Possible With Note Investing?

Don’t get lost in the numbers—what matters is that they went from $0 to earning $6,000 a month in passive income with note investing!

You can do the same!

Ready to achieve success in note investing? The best time to start is now! Take advantage of the resources below to learn from industry experts, connect with a thriving community, and unlock your full potential in creative real estate financing.

Your journey toward financial freedom begins today—don’t wait to take the next step!

Whenever you’re ready… here are 4 ways we can help you start your journey into note investing: