For investors who want in on the real estate game, but don’t want the headache of owning a property, real estate notes are often a good compromise. Don’t get us wrong, notes do require a bit more work than the average investment, but there are plenty of options to fit anybody’s budget and time commitment. Below we will discuss the details of notes and some of their potential benefits.
What are Real Estate Notes?
In short, a note is a promise to pay back a sum of money under stipulations outlined in a contract. When a homeowner has stopped making payments on their mortgage, typically have very few options before the bank is forced to foreclose on them. However, an investor can jump in, purchase a note, and act in place of the bank over the homeowner’s mortgage. The investor can work out a more favorable repayment strategy for the homeowner that also benefits the investor with the interest payments.
The investor can keep the note until the loan is payed off, at which point the investor will not be receiving payments or making money on the property anymore and must find another investment. Or, the investor can sell the renegotiated note to another investor for a profit. If the homeowner fails to pay under the negotiated contract, the note investor can foreclose on the homeowner and either sell the property or turn it into a rental property.
Investors who may not have enough money to purchase an entire note may have the option to buy fractions of a note through a hedge fund. Investors can also use this strategy to invest in multiple properties at once, all potentially having different statuses, locations, and other risks. For more information about promissory notes, click here.
Active or Passive Investments
There are two types of notes investors can choose from: performing and non-performing. Performing notes are ones in which the borrower/homeowner is caught up on the payments and is regularly paying on time. These are lower-risk but may also return lower reward than a non-performing note. Non-performing notes are one in which the borrower/homeowner is not making regular payments and may require a renegotiated contract or initiate the process of foreclosing. These often involve large sums of legal fees in the beginning but can yield high rates of return once the process is settled. If the property ended in foreclosure, the investor would then own the property and would be responsible for selling or renting it out at that point. Any responsibility of the note holder can be outsourced, but doing so also means lower returns in the end.
Investing in notes has become much easier now that the public can find investment opportunities online and start seeing returns by the end of the month. However, just like with any investment, notes require due diligence on the part of the investor. There are scams online, and not every note is a great deal. Investors should complete ample research and talk to a note specialist before investing retirement funds into one. As long as investors understand the risks involved and exit strategies, notes are a diverse group of investments that anyone can utilize depending on their preferred investment involvement level.