When people think of the word “investing,” images of Wall Street, stocks and rental properties may come to mind. But, what about real estate notes?
While mortgage notes might not be the first thing you think of, there are plenty of reasons to invest in real estate notes including passive income, low up-keep, and versatility. But first, let’s start with the basics.
What is a Real Estate Note?
At its core, a real estate note is a promise to pay the balance owed on a property or home. These are most commonly created when a home is sold and the buyer borrows money through a bank or lending institution.
In the case of a seller-financed note, the seller lets the buyer purchase the home through an installment plan with future monthly installments (turning the seller into the bank).
While the original note terms are set in stone, the original holder is not obligated to keep the note forever. Frequently, they want to sell their note for a lump-sum down the road.
Enter, the note investor.
Reasons to Invest in Real Estate Notes
We all have our own individual reasons for investing. Here are a few reasons why we choose to invest in real estate notes.
1. Passive, Monthly Income
Passive income is everyone’s goal.
But, a real passive income doesn’t exist. Earning an income takes some type of initial investment or energy. So, it’s all about finding the situation that allows for the most profit with the least amount of work.
Welcome to real estate note investing. Investors earn monthly interest income without a ton of energy expenditure beyond verifying the monthly payments, ongoing tax/insurance status, and the initial note purchase due diligence.
It’s all of the income, without all of the work of traditional real estate investing.
2. Manageability
When people hear “investing” and “real estate” in one sentence, they often think of purchasing properties as rentals or fixer-uppers. Both of these instances require quite a bit of managing and work.
With real estate note investing, you are not responsible for things like property maintenance, tenants, property taxes, etc. Instead, the property maintenance is the job of the payor while you still collect monthly payments.
3. Investment Collateral
When it comes to purchasing real estate notes, they have an advantage that unsecured notes don’t: collateral.
Plus, that collateral is where the payor lives, in the case of an owner occupied home. These buyers have more incentive to keep paying as they are purchasing the home where their family resides.
As with any investing situation, it’s essential to invest and purchase only when you feel comfortable with the terms, collateral, payer, risk, and value.
4. Versatility
As mentioned, the original note terms cannot change unless agreed to in writing by both parties. But the note holder can change at any point through an assignment and endorsement of the note. And how you sell the note can even change.
Say the note holder wants to keep some future payments, but also wants a lump-sum of cash now. They can sell off part of their note and keep some of the future payments.
This type of flexibility gives note investing sought after versatility.
5. Community Benefits
Seller financing and privately financed notes don’t just benefit the note holder; they help buyers as well.
When a buyer can’t receive a traditional bank loan, they can turn to seller financing to purchase a home. This puts neighborhood homes in the direct hands of community members (versus large rental companies). In turn, this makes residents take more pride in their local area and properties, which can help drive up the community value.
So, it’s not just note holders that benefit from investing in real estate notes, but the buyers and community as well.