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Is Buying Mortgage Notes a Good Investment?

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Is Buying Mortgage Notes a Good Investment? | Debexpert

In the world of mortgage notes investing, there are various strategies available to investors. One often overlooked strategy is mortgage note investing. This approach allows investors to earn cash flow from real estate without the responsibilities of property management. But is buying mortgage notes a good investment? In this article, we will explore the concept of mortgage note investing, its benefits, and the factors to consider before diving into this investment strategy.

Key takeaways:
Buying mortgage notes can be a good investment for B2B companies, offering potential high yields and asset security. It provides a stream of income from borrower's repayments and potential property ownership if default occurs.

Understanding Mortgage Notes

Before delving into mortgage note investing, it is essential to understand what a mortgage note is. A mortgage note, also known as a promissory note, is a legal document that borrowers sign when obtaining a mortgage loan. It outlines the terms of the loan, including the repayment schedule, interest rate, and any other relevant information. The note serves as evidence of the borrower's obligation to repay the loan according to the agreed-upon terms.

What is Note Investing?

Exploring the world of note investing can provide a new avenue of opportunity for real estate investors. This type of investing primarily involves buying and selling real estate notes—these are essentially IOUs written by homebuyers promising to pay back a specific amount of money, plus interest, over a certain period. As an investor, you are essentially stepping into the shoes of the lender.

Unlike owning an investment property, investing in real estate notes doesn't involve dealing with tenants, maintenance issues, or property taxes. Instead, you're buying the debt secured by the property, which can provide steady monthly income.

Real Estate Mortgage Notes: A Different Type of Investment

When you invest in real estate mortgage notes, you make an alternative to buying physical properties. Real estate notes are mortgage loans where you, the investor, act as the bank. You're buying the borrower's promise to repay the loan, and your investment is secured by the property.

Note buyers, or note investors, can often find mortgage notes through note brokers or directly from the mortgage lender. This is a common practice in the secondary mortgage market. Financial institutions, hedge funds, and private lenders may be looking for an answer on how to sell my mortgage note fast for a variety of reasons, often at a significant discount to the loan balance.

Performing vs Non-Performing Notes

In the world of note investing, there are performing notes and non-performing notes. A performing mortgage note is where the borrower is making regular loan payments, often at a fixed interest rate. This can provide the note investor with steady, predictable monthly income. On the other hand, a non-performing note is one where the borrower has missed payments and is at risk of default.

Buying non-performing notes can be riskier, but they often come at a more significant discount, potentially leading to higher profits if the borrower resumes making payments or if the property is sold. However, if the borrower defaults, the note buyer may need to navigate legal fees and proceedings to take ownership of the property.

Is Note Investing Profitable?

The profitability of note investing can depend on several factors, including the loan's interest rate, the purchase price of the note, and whether the borrower makes their payments.

One of the potential benefits of note investing is the potential for regular income. Note buyers typically receive monthly payments from the borrower, which can lead to additional monthly income beyond most stock dividends or a savings account's interest.

Another potential benefit is the opportunity to purchase notes at a discount. If a note buyer can find a mortgage sold to another lender for less than its market value—perhaps because the borrower has missed payments—they can potentially earn significant profits.

However, there are risks. If the borrower defaults, the note buyer may have to foreclose on the property, which can involve legal fees and potential losses if the property's value has declined.

Benefits of Mortgage Note Investing

Investing in mortgage notes can offer several advantages to investors. Here are some key benefits to consider:

  1. Consistent Cash Flow: By purchasing mortgage notes, investors can receive regular monthly payments from borrowers. This steady cash flow can provide a reliable source of income.
  2. Diversification: Mortgage note investing offers diversification in a real estate portfolio. It allows investors to participate in the real estate market without the challenges and risks associated with property ownership.
  3. Limited Liability: Unlike owning physical properties, investing in mortgage notes reduces the investor's liability. The responsibility for property management and any associated risks falls on the borrower.
  4. Potential Higher Returns: Mortgage note investing can potentially yield higher returns than other fixed-income investments like bonds or savings accounts. Investors can earn interest on the loan amount, often at a higher rate than traditional investments.
  5. Flexibility: Investors have the flexibility to choose between performing and non-performing mortgage notes. Performing notes offer lower risk as borrowers are current on their payments, while non-performing notes may offer higher returns if the property can be foreclosed upon and sold.

Factors to Consider

While mortgage note investing can be a lucrative investment strategy, there are several factors to consider before diving in:

  1. Due Diligence: Conduct thorough research and due diligence on the borrower, property, and note terms. Assess the borrower's creditworthiness, payment history, and the property's value to determine the risk associated with the investment.
  2. Type of Mortgage Note: Understand the different types of mortgage notes available, such as residential or commercial notes. Each type has its own characteristics and potential risks and rewards.
  3. Interest Rates: Consider the interest rate associated with the mortgage note. Higher interest rates can lead to higher returns but may also indicate higher risk.
  4. Exit Strategy: Have a clear exit strategy in mind. Determine how long you plan to hold the mortgage note and whether you intend to sell it or keep it until maturity.
  5. Market Conditions: Keep an eye on the real estate market and economic conditions. Changes in interest rates, property values, or borrower behavior can impact the performance of mortgage notes.

How to Get Started with Mortgage Note Investing

If you're considering mortgage note investing, here are some steps to help you get started:

  1. Education: Gain a thorough understanding of the mortgage note market, investment strategies, and the legal aspects involved. Educate yourself on the risks and rewards associated with this investment strategy.
  2. Network and Seek Expert Advice: Connect with professionals in the real estate and mortgage note industry. Engage with mortgage brokers, investment advisors, and experienced note investors who can provide valuable insights and guidance.
  3. Assess Risk Tolerance: Evaluate your risk tolerance and investment goals. Determine the amount of capital you are willing to invest and the level of risk you are comfortable with.
  4. Perform Due Diligence: Conduct thorough research on potential mortgage notes. Analyze the borrower's financial situation, payment history, and property value. Engage in proper due diligence to assess the risk involved.
  5. Consider Professional Assistance: If you are new to mortgage note investing, consider working with professionals who specialize in this field. Mortgage brokers or investment advisors can help you identify suitable mortgage notes and navigate the complex process.


Mortgage note investing can be a viable investment strategy for individuals seeking passive income from real estate without the responsibilities of property management. While it offers several benefits, it is crucial to conduct thorough research, assess risk, and understand the intricacies of the mortgage note market. By considering these factors, investors can make informed decisions and potentially reap the rewards of this alternative real estate investment strategy. Remember, always seek professional advice and conduct due diligence before investing in mortgage notes.

Written by
Henry Arora
Head of Business Development

Experienced Manager with a demonstrated history of working in the Fintech/Customer services/Debt Collections industry. Skilled in Management, Debt Collections Sales, Leadership, Team Management, and Public Speaking. Strong operations professional graduated from Madhurai Kamraj University.

  • Fintech/Customer services Expert
  • Public Speaking
  • Debt collection Expert



Who holds a mortgage note?

The mortgage note is the legal document that proves ownership of the mortgage loan to the lender or investor. A mortgage-backed securities investor is one potential buyer of a note that has been sold by the original lender. Payments due from the borrower are to be made to the note holder, who may also opt to sell or transfer the note to another person. The capacity to collect mortgage payments or foreclose in the case of default is dependent on the lender's ability to track down the note's current holder.

What else is a mortgage note called?

Promissory note, real estate lien note, and deed of trust note are all terms that can be used to refer to a mortgage note. Both of these names relate to the same thing: a legally binding agreement outlining the terms and conditions of a mortgage loan. Mortgage notes can have different terms based on the lender, the borrower's credit, and the mortgage agreement. Borrowers and investors in the mortgage note market would do well to familiarize themselves with these various terminologies.

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