When you think of a mortgage, perhaps the first thing that comes to mind is assets borrowed to complete a large purchase such as a house or a vehicle. Not many people know that a closely related mortgage note could be a sound financial investment, especially if you’re looking for a stable cash flow.
Investors can ‘buy’ from property owners financially in need in the form of a mortgage note. Mortgage notes are a real estate investment that can provide the buyer with regular income without the hassle of maintaining a property—unless the borrower stops making their payments.
If you’re a real estate investor who wants a secondary, predictable, and long-term income, investing in mortgage notes is a viable option. This article briefly answers a few important questions to help mortgage note buyers come up with a smart and informed decision.
The Basics Of A Mortgage Note
More often than not, homebuyers can afford a portion of their buying price in cash. Thus, property owners will have to apply for a mortgage from lending institutions after paying the down payment in cash.
Once the need for financial assistance is established, a lender will ask the borrower to sign a mortgage and a mortgage note, a document that signifies the borrower’s guarantee to repay the money they’ve borrowed. The note will have specific components, such as the borrower’s name, the amount borrowed, the interest rate and terms, and what could happen if the borrower defaults on his or her payment.
Some mortgage brokers ‘sell’ notes to help ease the burden on borrowers who may have challenges making their property payments on time. Mortgage notes are legally binding and enforceable, so as the investor there’s no worry if the lender isn’t able to raise the funds because brokers will pick up the slack.
What Does Mortgage Note Investing Mean?
Buying or investing in mortgage notes means you’re stepping in the place of the lending institution or bank. Hence, a mortgage note investment allows you or any third-party to have rights over a property by paying the remaining debt. While you won’t buy or keep the property, your monetary return would be in the form of monthly payments broken down into principal balance and interest fees.
As a non-traditional real estate investment, the responsibility of paying for repairs, maintenance, taxes and insurance fees, all rest with the borrower.
In the event that the loan defaults, the notes investor may gain the right to the property title. If you find yourself in this scenario, you can sell the property for cash, or resell the note.
Is Mortgage Note Investing For You?
Investors looking to expand and diversify their real estate portfolio without going through the hassle of renovating or upkeep may find mortgage note investing lucrative. Mortgage notes could be highly attractive to those looking for passive and predictable income.
The primary considerations for investing will be discussed later. But check out these helpful resources if you want to learn smart mortgage notes investment strategies.
How Much Do Mortgage Notes Cost?
Each note could vary depending on a variety of factors, including loan-to-value ratio and the borrower’s payment history. Generally, though, a note may be valued from USD$20,000 to USD$50,000.
Things To Do Before Investing In Mortgage Notes
If you’re investing in notes for the first time, consider seeking the help of a reliable broker. If you want to take the route solo, brush up on your skills about how real estate investing works with an emphasis on mortgage notes investing.
Here are the main considerations before shelling out your hard-earned cash for mortgage notes:
- Study the borrower’s payment history: If you want to make sure you’ll get paid, look for homeowners who’ve paid substantial amounts of down payment, equity and monthly amortization. These individuals are less likely to default on their payments.
- Know how to study investment risks: All investments carry risks that vary based on the type you’re eyeing. In the case of mortgage notes, it’s helpful to look at the loan-to value-ratio, or LTV. Do this by dividing the mortgage price by the value of the property. A low LTV means a reduced investment risk.
- Study how to recoup your investment in advance: In case a borrower defaults on several payments, a note investor may take the property and choose from a few viable solutions to recover the investment cost.
For instance, a lender may sell the property or rent it out. If property prices are high, selling the foreclosed home may be an attractive proposition for receiving a one-time lump sum. If the lender wishes to continue earning stable and passive revenues, the latter option may be a better option.
The Bottom Line
Considering the amount of money involved in ‘buying’ mortgage notes, it’s imperative for a first-time investor to be cautious. Notes should be studied well to avoid losing money through high-risk investments. Make sure you’re making a smart investment and aim for a long-term income before parting with your savings.
Additionally, investing in mortgage notes is not a get-rich-quick-scheme. If you’re looking to earn high amounts of cash as soon as possible, you might want to set your sights elsewhere.