Mortgage Note Investing: What it is & How to Start
Investing in real estate can provide easy income without the hassle of property management. Learn about mortgage note investing and how to get started.
In the current economy, finding means of supplementary income is becoming more common. From putting extra time in on the job to using free time to get a second job or discover a side hustle, people seek supplementary income for various reasons, including inflation and cost of living, debt repayment, financial security, and building wealth. But unlike a second job, which requires active work and time commitment, investing has the potential to generate a mostly passive form of income.
Requiring less time and commitment than traditional forms of income, investing allows you to build wealth over time while giving you more control over your investment strategy than a second job would allow. Investing in real estate is growing in popularity for those looking for supplementary income through investing. With mortgage loan investing, you can preserve your capital through diversified real estate investments. Read on to learn more about mortgage note investing and how to invest in mortgages today.
What Is Mortgage Note Investing?
Mortgage note investing means purchasing the rights to receive payments on someone’s mortgage loan. When you invest in mortgages, you are purchasing the debt on a property, and in return, you collect payments from the borrower until the loan is paid off or the property is foreclosed upon, giving you passive income without the hassle of traditional property management.
Types of Mortgage Notes
There are two types of mortgage notes to consider when looking into mortgage note investing. Each carries different characteristics and risks.
Performing notes are mortgage notes where the borrower is up-to-date on payments and continues to make those payments according to the original loan terms. These mortgage notes are considered lower risk.
Non-performing notes, however, are considered higher risk. These mortgage notes indicate defaulted payments from the borrower, but they can be purchased at a greater discount than performing notes. This provides the opportunity for higher return on investment provided that the loan is brought back to performing status, the property is sold, or there is a foreclosure on the property.
Beyond performing and non-performing notes, you can invest in residential notes or commercial notes depending on the property. Residential notes include single-family homes or multi-unit properties while commercial notes are for industrial spaces, office buildings, and similar commercial properties.
What Composes a Mortgage Note?
An attractive investment opportunity, mortgage note investing involves several key components. If you have previously purchased a home, you may be familiar with some of the characteristics of a mortgage note. Mortgage notes include the following:
Principal: the original loan amount that the borrower agrees to repay. This is also how interest is calculated and repayment schedules are made.
Interest rate: the percentage of the loan amount the borrower pays as interest. This can be fixed or adjustable.
Term: the duration in which the loan is to be repaid. The typical loan term is 15 or 30 years for home purchases.
Repayment schedule: the plan for how and when the borrower will make payments. This includes the time frequency (months/years) as well as the amount of each payment.
Borrower and lender information: Identifying details of both the borrower and the lender. This includes names, addresses, and other relevant contact information.
Default and late payment terms: conditions or penalties for late payments. This protects the lender in the event of a missed or late payment and outlines steps to be taken if the borrower fails to meet the payment requirement.
Benefits of Mortgage Note Investing
Investors can generate a steady income with mortgage note investing. If you invest in mortgages (i.e. private debt funds), there are several benefits you can look forward to:
Passive income: A property investment without the burden of actual property management. Mortgage note investors receive monthly payments of principal and interest from the borrower.
Protection: Asset protection in the event of a default payment. Since the original mortgage note is secured by real estate, there is an asset associated with the investment that works in favor of the investor and offers some protection while reducing the risk. And, in the event the borrower defaults, an investor can foreclose on the property to recoup the initial investment.
Diversified portfolio: produce stable returns, even when the market is questionable. Look into different borrowers as well as various real estate types, loan programs, and locations to find the best option for investing. Compare this to the stock market, where if the market drops, you lose money.
Higher returns: Returns often hovering around 10 percent. This gives you a much better return on investment than a typical CD or bond and provides more opportunity going forward.
How to Invest in Mortgages
Ready to get started with a mortgage investment fund? To understand current market conditions, benefits, risks, and mortgage note investing steps, there are several places you can begin your search.
Banks, lenders, or other financial institutions
To maintain their portfolios as well as business risk, many banks sell off some of their existing mortgage notes. This is known as a direct purchase of a mortgage note. These notes typically go to larger financial institutions or lenders with real estate experience. Mortgage note investing from banks and related financial institutions, however, often comes with more minimum purchase requirements, something to consider if you are just starting your mortgage investment fund.
Note Brokers
Brokers are the middleman between seller and buyer in many financial situations. Note brokers purchase mortgage notes in bulk from banks and other financial institutions and break them down to smaller, single notes or bundles for investors.
Private Lenders
Individual lenders and private lending companies are an attractive option for those just beginning their journey in mortgage note investing. These lenders offer more flexible options than banks and large financial institutions, giving you some leeway in negotiating terms and conditions.
Learn More About Mortgage Note Investing with Capstone
Mortgage note investing provides the potential for reliable and passive income, security through real estate backing, and the ability to earn higher returns through strategic purchases and a diversified portfolio. With Capstone Investing, you can get started in our growth fund, a private real estate debt fund that targets 10 percent returns for investors that seek steady, passive income.
To learn more about our investment opportunities, please contact the Capstone team today.
