What is note investing?

[Cydy Palang]

What is note investing? I heard about it at one of the Biggerpockets podcast and it got me curious. It's something to do with lien and deed. Will you help me understand? :)

[Jon Holdman]

You guys are all making it too complicated. "Notes" refer to the "promissory notes". Those are the documents that outline the terms of a loan. "Investing in notes" is making loans or buying existing loans. Nothing more.

From a borrower's perspective a loan is a liability. For the lender, though, its an asset. Something that has value.

The lender can sell a note. When you're talking about a loan made to a corporation or government entity, these are called "bonds". But its still a loan.

There are many variations. "Originating notes" means making loans. "Buying notes" means buying an existing loan.

"Performing notes" are loans that are getting paid. "Non performing notes" are ones that are not getting paid.

The value of a loan is determined by 1) its outstanding principal balance (aka "face value", 2) its interest rate, and 3) the return rate you want. The outstanding balance, interest rate and number of remaining payments determines the payment. You work backwards from the current payment, then number of payments and the interest rate you want to determine the value to you. Often that's less than the face value. On a non-performing note, a lot less.

So investing in notes comes down to either creating new loans by loaning out money you have, or buying existing notes from someone else who originated the note or bought it from someone else.