There are many ways to invest in real estate. The most common way is to buy a property and “flip” it to raise its value or renting out a property in an “as is” state. Other ways of investing in real estate include investing in storage units, commercial property, or strip malls. These can help you generate income, receive tax benefits, and grow your wealth and equity.
Even though these are the most common ways to invest in real estate, they aren’t the only ones. There’s another way called real estate note investment or mortgage note. If you’re buying mortgage notes for the first time, here is a quick guide.
What is real estate note investment?
In a nutshell, note investing is the practice of purchasing mortgage notes for sale for the purposes of generating profits from interest payments, or profits gained from the sale of the real estate or of the note itself.
There are three main reasons why people invest in mortgage notes:
- For the regular monthly income they produce
- The fact they are secured against physical real estate
- They can be purchased at a discount to the unpaid balance
What are the types of mortgage notes?
There are two main types of real estate notes: performing and non-performing notes.
- Performing Notes: This is when the borrower is making their loan repayments promptly. Although lenders will rarely sell these types of notes, sometimes they do. Your primary focus here should be the current income you’ll be receiving in repayment and interest.
- Non-Performing Notes: This is when the borrower has stopped making payments, causing the lending institution to sell the note. That means you’ll be buying a debt that’s not being serviced. There’s a potential risk of losing your investment, especially if the loan is unsecured. However, you can use this as a basis to negotiate a good discount for the note.
What are the benefits of mortgage notes?
If you have decided to get into this type of investment, here are some benefits:
- You earn a passive income without the burden of maintaining the investment property.
- You can potentially gain a good return on investment if you manage to negotiate better interest rates with the borrower.
- Low running expenses as loan servicers are relatively affordable.
However, it is also good to note the disadvantages of mortgage notes:
- It’s a risky investment, especially for non-performing notes.
- It can be tough to ascertain how profitable a note investment will be since many factors determine how an investment goes.
Where to buy mortgage notes?
The leading sellers of mortgage notes are banks. They usually have a reserve ratio amount, which limits how much they can have in reserve for lending purposes. If a bank suffers low liquidity, they sell their loan to private investors, other banks, or hedge funds. You can buy notes from these buyers, as well as other investors like you.
When buying mortgage notes, the first thing to do is figure out your own goals. Do you want passive income with low risk? Big potential returns and/or losses? If you know what you’re looking for then you can find notes that fit your criteria.
Looking for mortgage notes in New York?
Let Melanin Homes help you find investment properties with high returns.
With our proprietary system, we find unique opportunities to invest in real estate through privately held mortgage notes, 1st trust deeds, contract for deeds and land contracts. We then pass these deals along to our preferred buyers who are looking for great competitive returns or truly positive cash flow.
Once we come across a new asset that fits your criteria, we immediately notify our Preferred Buyers of the deal. There’s excellent investment property buying opportunities in today’s market. New assets are added to our inventory on a monthly basis and they tend to get picked up extremely quick!
So, are you interested in getting on our Preferred Buyers List (it’s free) so you can be notified of each new asset or investment property available?
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