Welcome to the exciting world of real estate note investing! While you might think that I’m being sarcastic, please note that I’m 100% serious. Investing in real estate notes is a unique alternative to hard real estate acquisitions. If you want it to, a note portfolio can generate completely hands-off income streams, putting the “passive” back in “passive income.”
If you’re fed up with the hassle of being a landlord, keep reading.
What Is a Promissory Note?
A promissory note (often just called a “note”) is a formal IOU from a borrower promising to repay a debt. The note spells out the loan terms, and the borrower signs it to indicate their consent.
A note will typically specify:
The borrower and the lender
The amount borrowed
The interest rate
The repayment schedule
The date and location of issuance
What happens in the case of default
Once the borrower issues the note, the lender holds on to it while the loan is outstanding. Anytime before the borrower makes the last payment on the loan, the lender can trade or sell the note. Once the borrower fully pays off the loan, the creditor marks the note as “paid in full” and returns it to the borrower.
Lenders and borrowers can use promissory notes to memorialize various types of loans, but since we’re all real estate investors here, I will just be discussing mortgage notes.
What Is a Mortgage Note?
Mortgage notes are associated with home loans and secured by the real estate purchased. When someone takes out a mortgage, the bank or lending institution will usually have the borrower sign both the mortgage agreement and a promissory note.
Some states use deeds of trust instead of mortgages, but for our purposes, they’re essentially the same. In short, the promissory note captures the loan terms; the mortgage or deed of trust secures it with the real estate you’re purchasing. The lender will record their lien by filing the mortgage at the county land records office, but they’ll hang on to the note.
While promissory notes and mortgages are two separate documents that serve different purposes, they have a symbiotic relationship of sorts. You won’t find one without the other. Notes and mortgages are the peanut butter and jelly of the real estate financing industry.
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