One of the most effective real estate investment approaches out there is also one of the most overlooked: mortgage notes. Mortgage notes, commonly referred to as real estate lien notes or borrower’s notes, have become a widely used asset class in recent years. Buying real mortgage notes offer a host of advantages including rates of return that are greater than banks’ conventional low yield bonds or stock dividends.
What are Real Estate Mortgage Notes?
A real estate mortgage note is a promissory note secured by a mortgage loan. Hard money lenders require borrowers to sign both a promissory note and a mortgage. For example, say you want to buy a house listed at $350,000 but you do not have sufficient funds to buy it. You can apply for a loan in which you are able to pay a percentage of the purchase price out of pocket (typical 20%) as a down payment and then borrow the remaining amount from a hard money lender. Thus, in this hypothetical the loan amount would be $270,000 and the hard money lender would ask you to sign a promissory note and mortgage.
The note is a promise to repay the outstanding debt you incurred in purchasing the home and will specify the lender, the amount borrowed, the interest rate, the payment timeframe and what will happen in the case of a potential default. The mortgage is a separate document that collateralizes the lender and is secured by the real estate asset. It is essentially a contract that grants the lender foreclosure authority if the terms of the agreement are not met. It will set out who is personally obligated to repay the debt. Mortgage notes are not always registered, though they are legally binding documents. It is generally easier to buy private mortgage notes than buy a mortgage loan from a bank. This is why investing in real estate notes typically requires searching for the private market for such opportunities.
Advantages of Investing in Mortgage Notes
Mortgage notes are an ideal investment class for individuals seeking a passive income stream. When you acquire a mortgage note, you get the monthly installments that include both interest and principal. It is a consistent source of revenue similar to what a landlord would collect from tenants occupying a rental property—but without the added stress of maintaining the property. It is much simpler to invest in real estate assets in different geographical locations via mortgage notes because you don’t have to navigate different jurisdictional regulations related to licensing or taxes. The mortgage note dictates the loan duration so you know from the start how long you will receive loan payments.
You could potentially enhance the worth of the mortgage note by acquiring it form a distressed note holder. For instance, you may run across a farm or family-owned property that was sold via owner financing. The person sold their property, but now they have to manage the associated loan. They may be desperately in need of the money, whether it is to enable them to purchase a new residence or merely to fund their planned retirement. In this type of situation, you might offer $100,000 to purchase a $120,000 loan. If the financially distressed holder accepts, you will get the interest and principal on a $120,000 loan having paid only $20,000 for it.
Another category of ready and willing mortgage note sellers are private lenders with delinquent borrowers. These lenders are not receiving the income they anticipated when originating the loan but may be unwilling to foreclose on a delinquent family member or close acquaintance or simply don’t want the property back. You can typically purchase these notes for far below their face value; however, you will need to either step up collection efforts or foreclose on the asset. It is advised that these notes should only be acquired if you have a solid plan for how to monetize the property such as renting it out, selling it to someone else or redeveloping the property.
If you are looking for your next investment deal, you will want to consider partnering with a hard money lender. Alpha Funding Partners offers the best combination of rates and leverage. We pride ourselves in our fast turnaround times, quicker closings, customer service, and our experience in the industry. Reach out to Alpha Funding Partners today to learn more about obtaining your next hard money loan.