Understanding the basics of mortgage notes and how you can invest in them allows you to start understanding if they’re the right investment for you. Buying someone’s promissory note can lead to a nice passive income without any of the stress or obligations that come with being the landlord.  If you are handy, you could buy a property and flip it yourself.  Only if you want to spend every free minute working and none with your family on the weekends.

However, you don’t simply want to start buying real estate notes without doing some research and learning how to determine the best investments. Otherwise, you may find yourself purchasing mortgage notes that turn out to be bad investments. You’ll be left with properties that may not be worth much of anything, but since you now own them, you’re responsible. Let’s look further into what mortgage notes are and how you can determine which ones to invest in.

Look for Performing Notes

If you want to set up a passive income stream, you want to make certain the real estate notes you’re buying are considered performing notes. This simply means that the borrower is making their regular monthly mortgage payment. When you purchase the note, they will start making those payments to you, providing you with a monthly income.

On the other hand, some notes are considered non-performing notes. These are mortgages that are in default. The homeowner is no longer making their payments. The lender then has a choice: they can begin the foreclosure process, evicting the buyer and taking back the property, or they can sell the non-performing mortgage note to someone else. If they don’t want to deal with the foreclosure and simply want to make back some of the money lent through the mortgage, they may choose to sell the note for less than it’s worth simply to make back some money.

As an investor, buying a non-performing note may be something you want to avoid due to the amount of work you have to go through to foreclose on the non-paying borrower. However, these notes are also often sold at a very large discount. If you’re willing to deal with foreclosing and then flipping or re-selling the property, you can make a tidy amount of money. It is more work, though, and you’re not going to get that passive income stream that many people look for in buying real estate notes. Or you can buy notes that actually own the property, through Ryan’s Buying.

Do Your Due Diligence

Before you put down your hard-earned money to purchase a mortgage note, you need to do your research. Talk to the seller and ask them why they’re selling the note. Ask about any issues associated with the note, and talk to the homeowner if you can. They may be facing challenges that have caused them to miss a payment or two, but they may have just started a new job or have restructured their finances so that they can start paying again.

Take the time to verify all of the information. Remember that just because the seller or homeowner says something, don’t immediately assume it’s absolutely true. While unfortunate, there are some sellers who may want to off-load some mortgage notes quickly, and they may leave out some necessary pieces of information to do so.  You need to find a local real estate investor and one you can trust.  Make sure they have an office and a website otherwise, without credibility you should beware of potential scams.

Learn About the Property

The worst-case scenario of a mortgage note investment is that you have to foreclose on the property. You then own it, but what can you do with it? Is the house in good shape, or would you need to do some major repairs to it in order to sell it for a profit? If it just needs some paint and a few small updates, that’s not too bad. If you need to replace the roof and do some foundation work, on the other hand, you’re looking at investing even more money.  Working with an experienced real estate investor will help you mitigate this risk. Ryan’s Buying will lose money before their investors do.

If you have no desire to deal with any of that, you definitely want to avoid buying any mortgage note that is not performing and looks like you will have to foreclose upon, even if it’s incredibly cheap. You may find that you have to invest too much to make any profit.  Buying a note from Ryan’s Buying offers you 6-10% on your invested money, the check hits your mail box every month until the property sells. After the house sells, you receive the entire amount of the investment back.  Most of our investors continue investing with us, what would you do with an extra $600 a month?

Consider Buying Partial Payments

Did you know that you don’t have to buy the full note? It’s possible to purchase only a percentage of the payments. This may be cheaper than buying the note in full, and it gives you a short-term revenue stream. You can also buy a note and then sell some of the payments. In fact, some investors look for cheap notes and then sell some of the payments for a little more than they bought them for, instantly making a profit and retaining some of the monthly payments for later income! You may have to wait for years to start collecting on those payments unless the homeowner pays off their note early, but with the right portfolio, that long-term investment may be a great idea. Ryan’s Buying is eager to enter the commercial real estate market, which will allow for partial investments.