Most investors want to be the landlord. A smaller group has figured out that being the bank is often easier, because loans do not call at midnight about a broken furnace. Mortgage note investing means buying the debt secured by a property instead of the property itself. At Real Estate Sales LLC, we show investors how this strategy produces income without tenants, toilets, or turnover.
What a Mortgage Note Is
A note is the promise to repay, and the mortgage or deed of trust is the security instrument tying that promise to a specific property. When you buy the note, you step into the lender’s shoes. You collect the monthly payment, you hold the lien, and you have the right to foreclose if the borrower stops paying.
Performing Versus Non-Performing Notes
Performing notes have a borrower who pays on time, and they sell closer to face value for a predictable yield. Non-performing notes are in default and trade at steep discounts, sometimes forty cents on the dollar or less. The discount is your compensation for the work of modifying the loan, negotiating a payoff, or foreclosing.
Where Notes Come From
Banks and credit unions sell notes to rebalance their books. Hedge funds resell pools they have picked over. Private sellers who financed a property and now want a lump sum will sell their paper at a discount. Note brokers and online exchanges aggregate this inventory, though the best pricing usually comes from direct relationships.
How to Value a Note
Three numbers drive the price: the unpaid balance, the payment history, and the value of the collateral. The last one matters most, because if the borrower defaults the property is what you recover. Calculate your investment to value ratio, and never pay more for a note than you would pay for the house behind it.
The Due Diligence That Protects You
Confirm the note is properly assigned through every prior owner, that the lien position is what the seller claims, and that taxes and insurance are current. Order a title report and a valuation. Verify the borrower’s payment record with actual servicing statements rather than a spreadsheet the seller typed up.
Servicing and Compliance
Use a licensed loan servicer rather than collecting payments yourself. Consumer lending is heavily regulated, and the rules around notices, escrow handling, and default communication are unforgiving. A servicer costs a modest monthly fee and keeps you on the right side of laws that were not written with small investors in mind.
Earn Income Without Owning the House
At Real Estate Sales LLC, our Flip Cheap Houses™ program teaches you to evaluate collateral accurately, which is the same skill mortgage note investing demands. Know the property, and the paper takes care of itself.
Visit FlipCheapHouses.com to learn how to build income streams in real estate!
