Note Investing: You Become the Bank

What options are available when inventory is low and priced too high to be profitable? You become the bank with note investing!

For a real estate investor, note investing might be an excellent option for you. With this type of real estate investment, you won’t have to manage property or deal with other types of transactions actively. It’s passive income. 

As with any asset, you need asset protection. We provide asset protection strategies in all 50 states for all asset classes, including real estate notes. 

Use this guide to start you down the right path. Are you in the market for an investment that provides passive income without the dregs of property ownership? If so, note investing might be the answer to your prayers. Keep reading to evaluate the feasibility of this investment for your financial situation.

Note Investing Explained

Note investing is when you purchase real estate notes. The idea is that you change the terms of the note by reselling it, or you foreclose on the property to generate cash flow. 

What’s A Real Estate Note?

Simply put, the real estate note is two things. The first is the promise to pay or a promissory note. The second is a lien. A real estate note is the same thing as your mortgage note. 

In other words, it’s a written promise to pay money plus interest for a predetermined time. The mortgage places a lien on the title of real property to secure the written contract. If you default on your mortgage, the property may go into foreclosure. Defaults and foreclosures provide unique opportunities for real estate investors. 

When you start note investing, you know the difference between performing and non-performing notes:

  • performing notes are current. 
  • non-performing notes are in default

Why Should I Invest In Performing Notes?

Performing notes provide passive income. There is less risk in note investing with performing notes because the borrowers are keeping up with their mortgage. That means they make on-time payments. Those on-time payments provide a source of relatively reliable passive income. 

Why Should I Invest In Non-Performing Notes?

Note investing has several advantages. They are: 

  • cheaper
  • income potential
  • secured by real property

Cheaper: The non-performing real estate is secured by the equity in the property. If the borrower defaults, the real estate is more affordable to buy. You can purchase these notes from .38 to .62 on the dollar. 

Income potential: Another advantage is that depending on how you resolve the note, you could experience an excellent return on investment or create ongoing passive income. 

Secured by real property: Inflation. Stagnant wages. Whatever the reason, people are increasingly defaulting on their homes at a higher rate. For instance, there has been a 24% increase in foreclosures post-Covid indicates. Those homes represent a tremendous opportunity in this note investing space.

How Do I Get Started? 

You will need to find someone who will sell real estate notes to you. Typically, you will be able to buy notes from banks, other investors, note investment funds, and real estate brokers. 

Risks of Note Investing

No investment is without risk. Before making any financial decision, you should consult a qualified financial advisor or attorney to decide what’s right for you. There are a few perils associated with note investing:

  • Not FDIC insured
  • You can lose money at the auction 
  • A borrower may stop paying altogether and default, thus destroying your passive income

Rewards of Note Investing

Note investing has several rewards if you decide it’s the right investment strategy for you. Number one is it might make you a lot of money if you do it right. 

The first step, you have always got to cover your assets. You don’t want your assets exposed, so protect them. 

After that crucial step, you could potentially enjoy the benefits, including: 

  • potentially high ROI
  • good deals on delinquent properties
  • no real estate agents and their fees
  • generation of passive income

What Does It Mean To Become The Bank With Note Investing?

When you buy a note, you become the bank. As the bank, you have complete control over your exit strategy. As a real estate investor, that will bring some peace of mind. 

Key Takeaways

There are several things to consider when deciding whether note investing is right for you. Here are the primary takeaways from this guide:

  • don’t expose yourself; cover your assets
  • performing notes provides passive income
  • non-performing notes have a higher risk, but can be lucrative
  • there are both risks and rewards of note investing
  • becoming the bank with note investing mitigates risk a bit

Are you ready to speak with an expert? Learn about our comprehensive solutions you can use to achieve financial freedom, reclaim your time, protect your assets, and build your legacy. Book a FREE discovery call now.

Last Updated: 
July 6, 2022

Scott Royal Smith is an asset protection attorney and long-time real estate investor. He's on a mission to help fellow investors free their time, protect their assets, and create lasting wealth.

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