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Updated over 4 years ago on . Most recent reply

User Stats

57
Posts
31
Votes
Nicholas Z.
  • New to Real Estate
  • Mountain View, CA
31
Votes |
57
Posts

What are the downsides of mortgage note investing?

Nicholas Z.
  • New to Real Estate
  • Mountain View, CA
Posted

I've been researching mortgage note investing, and from everything I've read, it seems like a great way to invest in real estate. However, I've not seen much about how mortgage note investing can go bad. According to what I've read so far, assuming you've purchased a first-lien mortgage, the possible outcomes are:

1. The borrower continues to pay, so you get regular monthly income.

2. The borrower refinances, so you get paid a large lump sum and exit the mortgage.

3. The borrower pays off the mortgage, you get a large lump sum and exit the mortgage.

4. The borrower stops paying, at which point you can:

   a. Sell the mortgage note

   b. Reach out to the borrower to try to get them to pay again

    c. Foreclose on the property

This seems about as close to a no-lose situation as there can be...and that gives me pause. I don't believe in no-lose situations. There's always some way for things to go wrong and you lose your money.

So the question is: what are the downsides of mortgage note investing? How might I actually lose all or most of my money doing this?

Most Popular Reply

User Stats

427
Posts
390
Votes
Jamie Bateman
  • Investor
  • Baltimore County, MD
390
Votes |
427
Posts
Jamie Bateman
  • Investor
  • Baltimore County, MD
Replied
A few others to add: 1) there are no tax advantages to note investing, 2) a note decreases in value as the principal balance is paid down, 3) the borrower can stop paying and it is possible you cannot foreclose because there is not a clear chain of assignments/title, 4) see my blog post here on BP comparing notes to rentals: https://www.biggerpockets.com/...

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