When you think of investing, your mind may jump immediately to the stock market. Although that’s one option, it’s certainly not your only option for investing. In fact, most financial experts recommend a diverse approach to investing, which means including more than just stocks in your portfolio. If you’ve ever thought about investing in other options, you may be interested in learning more about mortgage notes as an investment opportunity.
What Are Notes and Mortgages?
Real estate is an investment area that many people are interested in because of its general stability. You might think that one of the only ways to invest in real estate is to buy and sell properties, but there’s another option for those who don’t want to be as hands-on in their real estate investments. This option involves investing in the loans that buyers take out to be able to purchase properties.
When an investor or private buyer wants to purchase a home or another type of property but can’t pay cash for the purchase, they get a loan. In exchange for the funds, the borrower will typically put a percentage of the purchase price down in cash and sign an agreement, known as a promissory note, that they will repay the loan. The note, or loan agreement, will outline the total amount borrowed, the interest rate, and the timeline for repayment. Additionally, it will cover what happens in the event of default or if the borrower fails to make the payments.
A mortgage is a separate document from the note that provides collateral to the lender, or allows the lender to take possession of the property if the borrower fails to meet the terms agreed upon by both parties. Mortgages also outline what property the loan is tied to, the responsibilities and roles of both signing parties, and what qualifies as a breach of the agreement. For all property loans, lenders will create both mortgages and notes, although they are commonly referred to as just a mortgage.
Types of Mortgage Notes
Mortgage notes are further divided into four main subcategories:
- Unsecured: A loan that has no tangible collateral associated with it that can be seized if the borrower fails to make the payments or follow the terms.
- Secured: Also called collateralized loans, secured loans have a tangible asset connected to the loan, such as the property or home being purchased.
- Institutional loan: A loan provided by a lending institution or bank, subject to the Bureau of Consumer Financial Protection and Dodd-Frank Act regulations.
- Private loan: A loan provided by a private individual, not subject to the same laws and guidelines for underwriting as institutional loans.
Another classification refers to the risk of a mortgage note. This classification splits notes into performing and nonperforming segments. Performing notes include those held by current borrowers, while nonperforming notes refer to those held by borrowers who have fallen behind on their payments. Another term for nonperforming notes is distressed notes, and these notes require investors to take on more risk.
Investing in Mortgages and Notes
If you’re interested in investing in real estate but don’t want to become a property flipper or landlord, you may want to consider the option to invest in mortgage notes. Mortgage notes can be excellent investment opportunities for those who want passive income. However, looking at the different types of mortgage notes available and determining your level of risk are important steps in deciding to add these loans to your investment portfolio.
In the past, investing in mortgage notes was riskier because the institutions and lenders weren’t subject to the same level of scrutiny or regulations that other financial services providers had to face. However, new legislation designed to protect both borrowers and lenders has alleviated some of that risk, allowing conservative investors to get involved in real estate investing. In order to protect yourself and your financial situation, it’s smart to vet borrowers and do your due diligence to get a sense of what they are able to afford and whether they should be able to continue making their payments.
Advantages of Investing in Mortgage Notes
One of the key advantages of investing in mortgage notes is the ability to earn passive income. Investing in any type of real estate can yield high returns, but buying and selling properties requires a lot of active work on your part. By investing in the loans that others use to purchase and care for homes and properties, you can get truly passive income without having to do any of the legwork. Owning a portfolio of mortgage notes is also more feasible for many investors than owning and managing multiple properties.
The volatility of the stock market also doesn’t impact the value of any mortgage notes in which you have invested. The real estate market impacts property values, so economic strength translates to higher home prices and fewer foreclosures. Investing in a strong real estate market can also reduce the risk, as the value of the home or property may produce enough equity to offset the financial risk associated with foreclosure and delinquency.
Choosing to invest in real estate mortgages also provides you with collateral, which is something you don’t get with stock investments. If the borrower isn’t able to make their payments, the institution that owns the note can take back the property and sell it, thus getting the money back for the investors. Mortgage investments also provide versatility that you won’t find in most other investment opportunities.
Wondering how to invest in mortgage notes? Our team of lenders at Titan Funding can help you explore options that fit your needs. We work with a private group of investors to provide innovative options. Our goal is to help you make your money work for you, and one way to do that is to invest in mortgage notes that provide passive income. We take pride in offering diverse and flexible investment opportunities to each of our investors as well as expert advice from our team of financial professionals.