Mortgage Notes 101: Are They Good Future Investments?

Banks, lending companies, and other financial institutions offer mortgage notes to investors. Mortgage notes are a form of real estate investment in which the investor doesn’t own actual property. Instead, the investor buys notes to become the new lender to a borrower and, in turn, receives the payments from the borrower, including the interests and fees. The details of the repayment are explained in these notes, including the amount of monthly payment and the length of time for such repayment.

A question may be asked, however, could mortgage notes be a good future investment? If you’re interested in investing in these notes, try to find out the answer by checking out the following mortgage note questions.

What makes them attractive?

Mortgage notes have different purposes in real estate, including primary residence purchases, second home purchases, equity release loans, investment property purchases, owner financing deals, and hard and private money loans.

There are performing or nonperforming mortgage notes. When a mortgage note is nonperforming, it means the borrower is not paying in accordance with the agreement and is already in default. When it’s a performing note, it means the payments are made in full and on time.

Performing notes could sell for 75–100% of their current value and sub-performing for 50–80%. The lower price tag is what makes them attractive to investors. Performing notes could make up a good future investment if you’re looking for something reliable and consistent. Garnaco explains that these performing notes could be perfect investments during this time of the pandemic, when borrowers find more flexible and creative financing solutions. You may also check out other finance sites to gain more insights on investing in performing notes today.

Nonperforming notes, on the other hand, could be riskier because of the defaulting borrowers, unlike performing notes with good-paying borrowers. However, what could make it attractive is that you could purchase the property for only 10–30% of its actual value. Therefore, you could invest in real property for a low cost.

Could they be a good addition to your investment portfolio?

Because of the high demand for mortgages nowadays, you could take advantage of this demand by investing in mortgage notes to diversify your portfolio. This could be a win-win solution for both you and the borrower. And it could be a good way for you to add a reliable income stream to your retirement accounts.

Instead of borrowing from banks, which normally have tighter rules, people tend to find more creative and less strict financing options, like mortgage note investors on the secondary market. As a new lender, you could set up the rules in terms of requirements, payment options, and consequences when a borrower defaults in their payments.

Are they good long-term investments?

Mortgage notes could be good long-term investments. Once you have established good borrowers, you could enjoy a good stream of monthly payments for the life of the loan. But of course, mortgage notes also have risks, so you need to be abreast of the right information about this investment.

Check out the following mortgage note investment tips to enjoy good long-term investment:

  • Ensure good payment history: When investing in mortgage notes, you have to weigh the historical return and potential return to gauge if they’re a good investment. So due diligence must be employed when vetting borrowers. Try to check the borrower’s payment patterns. Two to three years of good payment history means the mortgage note could be a worthwhile investment.
  • Hire a broker: Buying mortgage notes directly from banks could be tough. You could use a broker to find mortgage notes for you from private and public deals. Online marketplaces or online trading platforms would make it easier for you to buy mortgage notes.

Are they a good passive income source?

Mortgage loan borrowers could also be real estate investors who want to buy a property and renovate or flip it then sell it for a higher price. They find interested private investors to finance a real estate investment, and you could be that investor. Once you have found a good-paying real estate investor to partner with, it’s like operating real estate property with your own property manager.

Therefore, buying mortgage notes could be a hassle-free way of investing in real estate without actually managing them. It could be a real passive income for you, plus it could build partnerships. This scheme could be a win-win solution for you and the real estate investors you’d finance.


Mortgage notes could be a good future investment. People who want to get a home loan tend to steer clear of traditional financing institutions, like banks, because of their stricter criteria and requirements. Hence, they usually resort to other financing solutions, in turn opening great opportunities for mortgage note investors. If you’re a risk-taker and knowledgeable about various exit strategies for this type of investment, mortgage notes could be a good investment to try.

Share on:

Leave a Comment

This site uses Akismet to reduce spam. Learn how your comment data is processed.