How to Make Money with Real Estate Notes

real estate notes

Portfolio diversification not only protects you from market swings, it can provide another practical way to increase your income stream and build wealth. Novice and experienced real estate investors turn to real estate notes because they’re lucrative, secure, and generate passive income.

While real estate investment has a proven record, it does have a learning curve and market conditions change continuously. Real property investors who own turnkey or rental properties have the advantage in this field, since they’re familiar with lending rules and regulations and understand the basics that drive real estate markets.

What Are Real Estate Notes

Real estate notes can be mortgages for primary and second homes, along with HELOCs (home equity lines of credit) and bridge loans. People can act as banks by funding these lending instruments independently or by participating in investment groups that specialize in mortgage lending.

What are the Benefits of Real Estate Notes?

The advantages of mortgage investments include:

  • High liquidity. Recapitalizing or selling has a quick turnaround.
  • Solid earnings. It’s common for investors to receive double-digit returns from the low teens to the twenties.
  • Low barrier to entry. Some peer to peer (P2P) groups allow investors to join for as little as $25.
  • Favorable tax treatment. The IRS treats the income as passive instead of earned.
  • Security. Mortgages, bridge loans and HELOCs are secured loans. Should the borrower default, you can take the property back.

See also Should You Finance or Pay Cash?

How to Make Money with Real Estate Notes

Getting Started

It’s not hard to get started as a mortgage investor given these resources:

  • Using P2P. Peer to peer (P2P) groups have sprung up over the last decade online that make mortgage loans or down payments to home buyers. Their track records match the overall performance of other P2P lenders.The interest rates are lower than what conventional mortgage lenders would charge given the borrower risk, but they make up for it in higher collection fees for late payments. Most clients of the P2P lenders tend to have lower credit scores, but this fact hasn’t interfered with the default rates on P2P mortgages which equal those of bank-issued notes.
  • Finding private lenders. The Mortgage Bankers Association and the American Association of Private Lender are good places to find private investors who make mortgage loans. You can invest with them to fund mortgages or bridge loans. The interest rates private lenders charge are higher than those associated with traditional banks and lending companies.
  • Buying existing notes. This may be the most secure way to get into the mortgage lending field because you can track the payment records of the borrowers. Called seasoned loans, these investments can be more difficult to find. A good place to start is by contacting a local real estate lawyer or financial advisor.
  • Investing in mortgage REITs. Mortgage real estate investment trusts borrow at low short term rates to buy mortgages. The interest rate differential yields good profits for investors. Many of these REITs are publicly traded on stock exchanges. A publicly traded startup group is even specializing in reverse mortgages, banking on the need for baby boomers to augment their retirement incomes as they age.

See also Do You Need an Investing Partner?

The Bottom Line

Augmenting your income with mortgage notes is a viable way to expand your real estate holdings. The risks are low since the property provides security, returns exceed those of other asset classes and the profits receive favorable tax treatment.

Talk to one of our investment specialists to learn how JWB can help you earn passive income through long term real estate investing.


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