Mortgage Note Investments

One of the most lucrative but least known real estate investments is mortgage note investing. When you invest in mortgage notes, you’re investing in ownership of real estate but not having to manage it. Also, the homeowner pays the investor as opposed to the bank. If you want to invest in real estate at a low price point, mortgage note investing is worth a look.

What Is a Mortgage Note?

A promissory note secured by a mortgage is a real estate mortgage note or a deed of trust, depending on the state or security instrument involved. These are two parts of the entire investment, and they’re dealt with together. The promissory note lays out the loan provisions, including the term, amount, and interest rate. The deed of trust or mortgage note secures the loan, which means the investor can foreclose on the property if the loan is defaulted on.

The main difference between a deed of trust and a mortgage is how you can foreclose on the secured property. You must take legal action to foreclose upon the property with a mortgage. A deed of trust is a non-judicial foreclosure process. You simply have to submit a notice to the public record that gives the details and date of the sale.

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Investing in Non-Performing vs. Performing Notes

When the borrower doesn’t meet their payment obligations as agreed, the note in question is a non-performing note. Conversely, it stands to reason that performing notes are those in which the payments are made both in full and on time. If you’re looking at a sub-performing (making payments that are either less than the amount or not timely) note, you can purchase those for 50% to 80% of their value.
On the other hand, performing notes will garner about 75% to 100% of their current value. The lower financial entry point for non- or sub-performing notes attracts investors. The lower price factors in the associated risk increase for those who haven’t been paying their mortgage or had difficulty before. Meanwhile, a non-performing note currently in default may be available at 10% to 30% of the current market value. This is an inexpensive way to purchase a real estate investment property. The downside to that is, of course, the work of either having to negotiate new terms or foreclosing the property.

Mortgage Note Investing Risks

There’s no FDIC or any other insurance behind these notes. Instead, they’re secured by property that might not be taken care of and could significantly deteriorate over the loan term. You’re not responsible for the upkeep, so there’s little you can do to rectify the lack of care. The other side of this coin is that you want to check the property’s condition before purchasing the note so you don’t overpay for it.

If you need to foreclose, it’ll cost money in legal fees. You’ll need to pay filing and associated charges to foreclose if it’s a mortgage. You may need to sue the borrower to get those costs and any back payments owed. Make sure you know the foreclosure regulations before purchasing a non-performing note, so you know what expenses you might incur and can be confident you’ll profit from the deal. Additionally, it’s common for non-performing investments to depreciate before foreclosure, as the owners may not be inclined to keep the property in good condition if they know they’re losing it.

Another potential issue is the lack of regulations on the mortgage note industry, making mortgage note investing a risky proposition. You can purchase a mortgage note without the occupant having to consent or even being aware of it. But remember, you’re not buying the property, only a note secured on the property. That subtle but essential distinction sometimes means that property owners refuse to make payments because they don’t believe they owe you anything. To alleviate this issue, ensure excellent communication, starting with the current note holder informing the owners that the loan is being sold to someone else.

If you’re looking for a multi-family property to purchase a note for, analyze and research the situation thoroughly. They may be at or near full capacity, but it could be a money drain if many tenants are behind on their rent. Also, ensure it’s in a good, habitable condition, so you’re not purchasing something that may require substantial repair investments.

If you purchased a note for a multi-family rental property, find out if you’ve got any role in deciding who to hire as a property manager. A good property manager can attract new tenants, while a bad one could put them off. If you can select the property manager, having a good one can increase payment and occupancy rates and the average monthly rent.

Ensure you also get a copy of the original note, including all assignments and amendments. You don’t want any surprises that carry over from the original note, such as being sued by another who has the property title. A title search company is a good investment and saves money and hassle. Finally, make sure you’re aware of your lien position, the order in which creditors are paid from the proceeds of the sale. If the property sells for less than what is owed and you’re low on the list, you may not get what you’re due or even nothing at all.

If you’re looking for a passive income stream on real estate or looking to flip property for a profit without the hassle of managing the property, a real estate note is a good choice. Beyond doing your due diligence on research and going through the purchase process, there’s very little work, making it an excellent passive income stream.

When you need funding solutions, contact the team at Titan Funding at 855-929-1134 or complete our secure online form. We offer hard money loans, fix-and-flip loans, rental property loans, and more. Our experts have the knowledge and experience to provide outstanding service for your investment needs.
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