Investing in real estate is like eating at a buffet: There’s many options to choose from. From fix and flipping to wholesaling, co-wholesaling, house hacking and more, each strategy comes with its own advantages and disadvantages.
If you’re looking for a strategy that can potentially earn you steady income without the headaches of property management or hunting for deals, investing in real estate notes may be for you.
Because investing in real estate notes is one of the less traditional forms of real estate investing, it does come with many questions — which we’ll answer in this guide.
Let’s get started!
1. What is real estate note investing?
First things first: Real estate note investing involves purchasing the debt and the promissory note that secures real estate.
As a note holder, you become the lender, collecting monthly payments from the borrower, earning interest, and having the right to foreclose on the property if the borrower defaults.
2. What are its advantages?
Investing in real estate notes comes with several advantages, including:
- Passive income: Investors earn regular interest payments.
- Asset-backed security: Investments are secured by physical real estate.
- No property management: There’s no need to manage tenants or property issues.
- Diversification: Notes can offer portfolio diversity.
- Potential for high returns: This is especially pronounced with non-performing notes bought at discounts.
- Reduced operational hassles and more liquidity: Notes are easier to trade than properties.
3. Does real estate note investing work today?
Yes, real estate note investing remains an effective real estate strategy for investors today.
The best part is that you can do it as your time allows: full time, part time, or even every so often.
4. Do you need a license to invest in real estate notes?
While you don’t need a license to purchase notes for your own investment portfolio, if you broker notes for others for a fee, many states require a license or registration, especially for brokering residential mortgage notes.
5. Is bird dogging similar to investing in real estate notes?
No, bird dogging is not the same as note investing.
Bird dogging involves finding promising property deals and passing leads to investors for a fee, without investing your own capital.
Note investing involves owning the debt itself and collecting payments or managing the loan. To go along with our metaphor, these are two different flavors at the buffet!
6. How long does it take to get results when investing in real estate notes?
The timeline depends on the type of note.
With performing notes, investors receive monthly payments right away.
Non-performing notes may require months of negotiation or foreclosure.
Most note investors see returns within months to a year, of course depending on strategy.
7. How much does it cost to invest in mortgage notes?
Simply put, note prices are primarily determined by their balance, risk, and performance.
Smaller performing notes can be acquired for a few thousand dollars, while larger or institutional notes may require tens of thousands. Non-performing notes are often sold at steep discounts — sometimes for a fraction of their face value.
8. Will this work outside the U.S.?
Yes, international note investing is possible, but it’s more complex. Investors face additional risks like foreign regulations, currency fluctuations, legal differences, and market knowledge gaps.
9. When you are an income notes investor, what title do you give yourself?
It’s up to you!
Common titles include Note Investor, Mortgage Note Investor, or simply Income Investor.
10. What if no due diligence is conducted when investing in real estate notes?
Skipping due diligence exposes you to major risks: You may buy notes with defective property titles, overvalued collateral, uncollectable loans, or undisclosed legal obligations.
Always review the borrower’s payment history, property conditions, legal documents, and regulatory compliance before investing.
11. Is LLC a requirement to invest in real estate notes?
Forming an LLC is not required but is highly recommended.
Why?
Well, an LLC provides liability protection, separates your personal assets from investment risks, and may offer tax benefits.
Many investors use LLCs for practical and legal protections, but you may invest as an individual.
12. If someone buys a note, what happens to the original lender that gave the loan?
In this case, the original lender sells the mortgage note, transferring their rights to the payments and recourse against the property to the new note holder.
The original lender no longer has a financial interest in the loan, and the new owner (the investor) receives future payments and enforces the note if needed.
Conclusion
There you have it… the most frequently asked questions about real estate note investing.
With note investing, you have the opportunity to build wealth, diversify your portfolio, and generate passive income — without the challenges that come with direct property ownership.