Real Estate Note Investing: Everything You Need to Know

Does real estate note investing pique your interest? Well, you’ve come to the right place! As an investor, it’s wise to diversify your portfolio and explore new investment opportunities. Real estate notes are one option that can generate serious cash flow—but only if done right!

Photo of a woman counting money with her laptop on the coffee table
Real estate note investing is far different from collecting rent payments from rental property tenants. | Photo by Karolina Grabowska

If you’re new to this form of investment, however, it can be difficult to know where to start. There many real estate investing strategies so how do you know if this one is right for you? We’ve put this guide together to help you answer that very question and see if real estate note investing is the best choice for you.

What Are Real Estate Notes?

Real estate notes, also known as mortgage notes, are written agreements between a lender and a borrower to finance a real estate purchase. In simpler terms, they are an IOU that outlines the details of a loan for purchasing or refinancing a property.

When investing in real estate notes, you essentially become the lender and receive payments from the borrower (or note holder) for the principal amount, plus interest. These payments can be in the form of monthly installments or a lump sum at the end of the loan term.

Real estate notes are secured by physical assets, which means that if the borrower defaults on their payments, you have the right to foreclose on the property and recover your investment. This makes it a relatively low-risk investment compared to other forms of real estate investing.

Understanding Performing Notes and Non-Performing Notes

There are generally two types of real estate notes: performing and non-performing. Understanding the difference between these two is crucial when making your investment decisions and building your strategies.

A performing note refers to a loan where the borrower makes timely mortgage payments. This is considered a good investment as it generates consistent cash flow and minimizes the risk of default.

On the other hand, a non-performing note (NPN) refers to a loan where the borrower has stopped making payments or is behind on their payments. These notes tend to be riskier and require more attention and effort from the investor to turn them around.

Investing in NPNs can sometimes lead to a higher return on investment (ROI) as there’s room for negotiation with the borrower, such as offering a loan modification or purchasing the property at a discounted price. However, you should remember that there’s also a higher risk of losing your investment if the borrower doesn’t cooperate.

Is Investing in Real Estate Notes a Good Strategy in 2023 Moving Forward?

New real estate note investors may wonder if this is a good strategy in 2023 and beyond. The simple answer is, “Yes!”

First, let us look at the current real estate market. With forecasts predicting housing prices to continue to rise, many potential buyers will also find it difficult to afford a down payment or secure financing for their dream home. This creates an opportunity for investors to step in as lenders and offer alternative financing options through real estate notes.

Also, the Federal Reserve has indicated to hold interest rates steady for the foreseeable future. This creates a favorable environment for real estate note investors as lower interest rates mean higher returns on their investments.

Additionally, with the rise of technology and online platforms, this type of investment is expected to become more accessible than ever before. Real estate note marketplaces have emerged, making it easier for investors to find and purchase notes without going through traditional channels.

The real estate market is cyclical, and while there may be short-term fluctuations, the long-term outlook remains positive for real estate note investing. As long as there’s a demand for housing and the potential for returns, this should be a lucrative investment strategy.

Risks Associated with Real Estate Note Investing

While real estate note investing can be a profitable strategy, it’s not without its risks. As with any investment, there are potential drawbacks to consider before jumping in.

Borrower Payment Defaults

One major risk is the borrower defaulting on their payments. While having the physical asset as collateral provides some security, foreclosure and selling the property can be a lengthy and costly process. It’s crucial to conduct thorough due diligence and carefully select the notes you invest in to minimize the risk of default.

Interest Rate Risk

If interest rates rise, it could affect your ROI on fixed-rate notes. On the other hand, if interest rates drop, borrowers may choose to refinance their loans at a lower rate, resulting in early repayment and a loss of potential income for the investor.

Market Conditions and Property Value

Real estate values are also subject to market conditions, which can affect the value of the property securing your note. A downturn in the housing market could result in a decrease in property value, reducing your potential returns.

5 Success Tips for New Real Estate Note Investors

Photo of a man raising his hands in success after completing a task on his computer
Now more than ever, there are many ways to experience success in the world of real estate.| Photo by Tima Miroshnichenko

Now that you have a better understanding of real estate note investing, here are some tips to help you get started on the right foot. 

1. Educate Yourself

As with any investment, knowledge is key. Take the time to research and learn about real estate note investing, different types of notes, and how to evaluate them. The more you know, the better equipped you’ll be to make sound investment decisions.

2. Always Examine the Deal Structure

Before you invest in a real estate note, you should carefully examine the deal structure first. This includes understanding the terms of the loan, interest rate, and repayment schedule. It’s also essential to review the borrower’s credit history and financial situation to determine their ability to make payments.

Moreover, consider the loan-to-value ratio (LTV), which is the amount of money borrowed compared to the value of the property. A lower LTV usually indicates a less risky investment.

3. Assess the Risk-to-Reward Ratio

Note investing in real estate is a lucrative strategy, but it’s important to assess the risk-to-reward ratio before making any decision. This involves evaluating the potential risks and rewards associated with a particular note.

For example, a non-performing note may offer a higher return, but it also comes with a higher risk of default. On the other hand, a performing note may provide a lower return, but there’s less risk involved.

Remember, a balanced risk-to-reward approach is key to successful real estate note investing. So, carefully evaluate each potential investment and determine if the potential reward justifies the associated risks. This can be done by conducting thorough due diligence and consulting with experienced investors or professionals.

4. Weigh How Attractive and Secure the Deal Is

As a new investor in this field, it can be tricky to determine which opportunities are the most attractive. A good starting point is to focus on performing notes with a lower LTV and higher credit ratings for borrowers.

You should also consider the security of the deal. Is the property in a desirable location? Are there any potential issues or red flags that could affect the value of the property? These are crucial factors to consider when evaluating the deal’s attractiveness and security.

5. Have the Right Strategy in Place

As there are clickfunnels strategies for Realtors, there are also strategies for real estate note investors. Having a clear investment strategy in place can help you stay focused and make informed decisions. Here are three routes that you can take.

  • Buying Notes Directly – You purchase notes directly from the lender or through a note marketplace. It allows you to select specific notes that align with your investment criteria.
  • Rehabbing Notes – This strategy involves purchasing non-performing notes, rehabilitating the property, and then selling it for a profit. It requires more capital and experience but can offer higher returns.
  • Renegotiating Notes – In this strategy, you negotiate with the borrower to restructure their loan terms, such as lowering the interest rate or extending the repayment period. It can be a less risky option for new investors.

When developing your strategy, consider your goals, risk tolerance, and available resources.

By following these real estate note investing tips, you can increase your chances of success and make informed decisions. With patience and persistence, real estate notes can be a profitable addition to your investment portfolio.

Where Can You Invest in Real Estate Notes?

There is more than one way to go about real estate mortgage note investing. Here are the four primary options you have.


Banks are an excellent option for investing in real estate notes, as they often have a vast inventory of mortgage loans available. They typically offer lower-risk options, such as performing notes with solid credit ratings and low LTVs.

However, note that banks may have strict requirements for investors, such as a high minimum investment amount or prior experience in the field. So, do your research and speak with a bank representative to understand their specific requirements.

Note Funds

These are investment vehicles that pool investors’ money to purchase a portfolio of real estate notes. This option allows for diversification and may offer professional management of the investments. However, note funds may also come with higher fees and lower potential returns.

Mortgage Note Investment Firms

Some companies specialize in purchasing and managing real estate notes on behalf of investors. These firms offer professional management and may have a selection of different note options for investors to choose from.

The best thing about investing with these firms is that you do not have to deal with the day-to-day management of the notes, making it a hands-off investment option.

Online Real Estate Trading Platforms

You can find real estate trading platforms online that allow you to buy and sell real estate notes directly. These platforms offer a wide variety of note options, allowing for more flexibility in your investment choices.

However, it’s crucial to do thorough research on the platform and the notes available to ensure they meet your investment criteria and are reliable.

Get Started with Your Investment Journey Now!

With this guide, you should now be able to start real estate note investing with confidence. Remember to always do your research and evaluate each potential deal thoroughly to make informed decisions. So, do not wait any longer, and start building your real estate note portfolio today!

For more useful real estate investing tips and information, feel free to check out our other posts!

Tre Pryor, Realtor

Tre Pryor is the leading real estate expert in the city of Louisville. He is a multi-million dollar producer and consistently ranks in the top 1% of Louisville Realtors for homes sold. Tre Pryor has the highest possible rating—5.0 stars on Google—by his clients and is routinely interviewed by the local NBC news. Tre Pryor is a member of the RE/MAX Hall of Fame.