5 Strategies for Investing in Real Estate Mortgage Notes

Investing in mortgage notes (also called real estate notes) can be an exciting alternative for real estate investors looking to branch out or break free from the landlord game. Real estate notes are a type of promissory note secured by a mortgaged piece of real property.

If I’ve lost you, I recommend checking out my introductory articles on investing in real estate mortgage notes: “How To Earn Passive Income Without Tenants or Toilets” and “How To Find & Finance Real Estate Mortgage Notes” before moving on to strategy. If you’re already familiar with mortgage notes, let’s take a look at several different ways you can use them to make some cash.

How To Invest in Real Estate Mortgage Notes: 5 Proven Strategies for Success

Strategy #1 — Invest in Performing Mortgage Notes for Slow and Steady Returns

If you’re looking to build a portfolio that provides reliable, long-term, absolutely passive income, performing notes are the strategy for you. Performing notes are just what they sound like—the borrower is making payments, and the loan is not delinquent. You can typically pick up this kind of note at a slight discount from the remaining mortgage balance (think 5-15% off).

By investing in performing notes, you can step into the previous lender’s shoes and simply collect rent payments from stable borrowers each month. It’s a lot like being a landlord—but without the hassle of having tenants. While your ROI will be comparable to that of a savings account or dividend stock, the necessary time commitment for performing notes is also similar to these types of investments.

Strategy #2 — Purchase Non-Performing Notes, Foreclose, and Flip

Non-performing notes are everything performing notes are not—fast, risky, and able to offer a high ROI.

The method of choice for some non-performing note investors is:

Buy a mortgage note where the loan is in default.
Foreclose on the property or secure a deed in lieu of foreclosure.
Get the property into selling condition.
Sell the property at a discount or use it as a rental.

If that sounds like a lot of work for a “passive” income stream, that’s because it is. But the reward of a successful non-performing note investment can significantly exceed the revenue from performing notes—and in a fraction of the time.

You can often score non-performing notes at a substantial discount, typically between 20-50%. If you can stomach the risk and have the time to put in the necessary work, this strategy can have an outstanding ROI.

Strategy #3 — Turn Non-Performing Notes Into Re-Performing Notes

This strategy is essentially a hybrid of the first two tactics. It offers a medium ROI with a medium amount of risk. You start by purchasing a non-performing note at a discounted rate. But instead of foreclosing, you work with the borrower to help them perform on their loan again. Since you’re now the lender, you can modify the loan terms to be whatever you want, so you can rework the mortgage to make it affordable to the buyer.

Once the borrower gets back on track with their payments, the note is considered re-performing, and you can just sit back and collect payments each month. This approach saves you the time, expense, and headache of foreclosing and flipping the real estate while offering a more significant ROI than investing in performing notes. You’ll have the benefits of both the massive discounts available on non-performing notes and the passive income stream offered by a performing note.

Strategy #4 — Creating Your Own Mortgage Note When Selling Real Estate

If you’re looking to seamlessly incorporate mortgage notes into your hard real estate portfolio, it’s time to try creating notes instead of just purchasing them.

Here’s how it works:

Buy an investment property.
Rent it out and let it appreciate until you’re ready to sell.
When you sell, create a seller-financed note that allows you to hold the mortgage.

This strategy lets you combine the benefits of REI—which, if you’re reading this, you’re probably already doing—with the passive income of note investing. You’ll not only make money off the sale, but you’ll get the interest on top of that with very little additional work. Not too shabby, if you ask me.

Strategy #5 — Minimize Your Time Investment by Working With a Mortgage Note Broker

If you’re looking for an especially low-effort investment, you might want to consider working with a broker. Finding notes for sale and deciding if they’re a smart investment can send even the savviest potential note buyers running to the hills.

Working with a mortgage note broker can help you get over your initial concerns by providing a knowledgeable partner to guide you.

A broker can help you:

Navigate the investment process
Find notes for sale
Manage your investments
Mitigate risks

No matter which strategy (or strategies) you choose, investing in mortgage notes can be a great way to expand and diversify your portfolio. For some, it’s also a welcome break from some of the not-so-glamorous aspects of hard real estate investments.

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Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.