Active vs. Passive Note Investing - Which is Right for You?

Many investors are drawn to the idea of note investing, and understandably so. I feel that it can be quite a powerful asset class that deserves consideration for just about any investor’s portfolio. When it comes to getting started with note investing, there are two ways to get involved – the active investing approach, and the passive investing approach. We will compare the two approaches to help you decide what is best for your retirement savings.

Active Note Investing

Active Note involves actively managing a portfolio of notes. This includes activities such as:

• finding notes to buy
• analyzing notes
• performing due diligence
• managing the vendors, attorneys, and other service providers that are needed to support a note portfolio

Being good at building and nurturing relationships is also a crucial skill, since the notes business is a relationship-based business. Strong relationships are a key component to bringing in steady deal flow and access to notes in the marketplace.  Active investors rely on research, analysis, and market trends to make investment decisions. Active note investing is a full business which involves higher levels of risk and requires more time and effort than passive investing.  

Passive Note Investing

Fund managers professionally manage passive note funds. Structured very much like a real estate syndication, the passive investor places their capital into the note fund and receives a return on their investment. Passive investors fully benefit from the experience, the expertise, and the relationships that the fund operators have. Another benefit is that of greater diversification, since their investment capital is effectively spread out among many notes that are owned in the fund. The only work for the investor is performed prior to investing. This involves evaluating the fund parameters and performing the due diligence on the fund, and once they invest, they begin receiving their return payments or cash flow stream.  

Which investment is right for you? 

In conclusion, let’s maintain focus on the fact that this decision is largely based on how much time you decide to dedicate to the business of note investing. Yes, it absolutely is a business and it should be treated that way if you want to be successful. 

For those that like to be heavily involved, active investing is a great option. For others that may be busy professionals or business owners with limited time, then passive investing might serve you better. There is no right or wrong answer, and I have found that this is a very personal decision. I have even seen many investors successfully transition from one to the other. As we all know, individual circumstances change, and the seasons of life change as well.  

Consider this decision thoroughly, speak with experts, and evaluate your options. Equipped with that knowledge, you will surely make the best decision for you and for your lifestyle. 

Author Bio: Fred Moskowitz is a note investor and a best selling author who has trained countless investors from all walks of life on how to create passive income streams of their own. In the note industry, he manages a mortgage note investment fund and is considered an industry veteran within the note investing arena. Fred is an advocate for spreading awareness about self directed investing and enjoys teaching investors how to accelerate their financial growth using self directed investment vehicles such as self-directed IRA's and self-directed HSA's. Fred takes pride in educating investors to help them grow and profit in the note space, as well as being a trusted and valued resource in the arena of alternative investments.  You may also connect with him via his website.