Investing in mortgage notes (also called real estate notes) can be an exciting alternative for real estate investors looking to branch out or break free from the landlord game. Real estate notes are a type of promissory note secured by a mortgaged piece of real property.
If I’ve lost you, I recommend checking out my introductory articles on investing in real estate mortgage notes: “How To Earn Passive Income Without Tenants or Toilets” and “How To Find & Finance Real Estate Mortgage Notes” before moving on to strategy. If you’re already familiar with mortgage notes, let’s take a look at several different ways you can use them to make some cash.
How To Invest in Real Estate Mortgage Notes: 5 Proven Strategies for Success
Strategy #1 — Invest in Performing Mortgage Notes for Slow and Steady Returns
If you’re looking to build a portfolio that provides reliable, long-term, absolutely passive income, performing notes are the strategy for you. Performing notes are just what they sound like—the borrower is making payments, and the loan is not delinquent. You can typically pick up this kind of note at a slight discount from the remaining mortgage balance (think 5-15% off).
By investing in performing notes, you can step into the previous lender’s shoes and simply collect rent payments from stable borrowers each month. It’s a lot like being a landlord—but without the hassle of having tenants. While your ROI will be comparable to that of a savings account or dividend stock, the necessary time commitment for performing notes is also similar to these types of investments.
Strategy #2 — Purchase Non-Performing Notes, Foreclose, and Flip
Non-performing notes are everything performing notes are not—fast, risky, and able to offer a high ROI.
The method of choice for some non-performing note investors is:
Buy a mortgage note where the loan is in default.
Foreclose on the property or secure a deed in lieu of foreclosure.
Get the property into selling condition.
Sell the property at a discount or use it as a rental.
Related: Property Lien Search: How to Find Out About a Lien on a House
If that sounds like a lot of work for a “passive” income stream, that’s because it is. But the reward of a successful non-performing note investment can significantly exceed the revenue from performing notes—and in a fraction of the time.
You can often score non-performing notes at a substantial discount, typically between 20-50%. If you can stomach the risk and have the time to put in the necessary work, this strategy can have an outstanding ROI.
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