What do you need to know about investing in promissory notes?
Note investing is an established alternative to traditional investment options. It involves the purchase, sale, and management of performing and non-performing real estate notes.
Note investing is popular because it:
- Can be relatively easy to manage
- Offers versatility in realizing a return
- Is a collateral-backed investment unaffected by the day-to-day volatility of the stock market
- Has limited sensitivity to fluctuations in interest rates
- Offers a larger, and sometimes quicker, return than other types of investments.
We teach a simple, practical way to invest in real estate, based on best practices from top investors.
With Alvernia as your guide, you avoid the “trial and error” approach and the need to spend on specialized real estate education — which means you free up more capital to invest.
Alvernia serves as your guide to real estate investing, bringing you expertise, practical experience and street smarts. That’s why you’ll find the answers to real estate investors’ questions on promissory notes here.
Note investing offers several advantages over traditional investments.
Backed by Collateral
One attractive aspect is that notes are backed by collateral. The physical property associated with a note offers a safety net against potential investment losses.
With stocks and bonds, investors risk losing significant value in their original investment when the stock market declines. They may find themselves waiting a long time hoping for a market rebound. While they wait, they lose out on additional investment returns.
A note is different. Even if a borrower defaults on a mortgage, the physical property and accompanying equity provide you the means to recover expenses on a default.
Foreclosing or obtaining a deed in lieu, and rehabbing and selling a property, enable you to fully recoup your investment.
Earn Returns in Multiple Ways with Note Investing
Note investing offers multiple opportunities to realize a return on investment. It can be a flexible, lucrative strategy.
One way in which note investors realize a return is through monthly principal and interest payments that provide a steady income. Over time, investors recoup their initial investments plus a return from interest payments.
Another way investors realize returns is through the collateral gap, the difference between the outstanding debt on a note and the market value of the associated property.
Performing notes are purchased at a moderate discount. Non-performing notes are purchased at steeper discounts due to the depressed condition of the notes.
When a borrower pays off a loan, usually by refinancing or selling a home, the note investor receives the difference between the discounted rate they paid and the actual full value of a note.
Investors who purchase a non-performing note, rehab the property and sell it to another investor at a higher price can realize even higher returns.
Other ways you can make money and mitigate risk with note investing include:
- Buying and selling partials (arrangements with other investors to buy or sell part of the payment term of a note)
- Borrowing against a note.
Either way, the investor uses an initial investment as a vehicle to free up funds to invest in additional notes. That’s how investors build up capital to invest.
Easy to Manage
Notes are a passive investment that’s relatively easy to manage.
Investing in performing notes takes some work, including due diligence before buying. A servicing agent can manage mortgage payments and escrow disbursements for a small monthly fee.
Non-performing notes may involve some work such as loan modifications, possible foreclosure proceedings or rehabbing and selling a property.
But unlike rental property, a noteholder is not responsible for ongoing property maintenance or other issues that landlords manage.
Because of its simplicity, you can own and manage multiple notes from the comfort of your office. Since much of the work is paper-based, you can earn an even larger return.
Note investing is a great investment opportunity, but it’s not a “get-rich-quick” approach. Every real estate investment involves a significant financial commitment – including note investing.
Compared with traditional investments like stocks or bonds, the amount of money you need to purchase a note is considerably higher. That’s because investors are essentially paying upfront for the cost of a house.
While investors recover their upfront investment over time through monthly payments, investors are committing considerable funds to an illiquid and cyclical asset. Those funds could otherwise go into investments such as stocks and bonds.
Appreciation of Properties
While note investors count on appreciation of property value as one means to earn a return, such appreciation is not guaranteed.
Investment losses can be triggered by a property that loses some market value or doesn’t generate the expected income.
Assess the risks and losses in terms of missed opportunities and holding costs.
For instance, if a high-yield corporate bond can earn you 4% interest, your real estate investment should seek to at least cover that “missed opportunity for income.” Hopefully it will provide a higher return over a given period of time.
No matter how much due diligence you conduct, there’s always a risk that a borrower will run into financial difficulty and stop making regular payments.
In this situation, the noteholder must work with the borrower to return the account to good standing. Or the noteholder must initiate costly foreclosure proceedings.
We buy and sell performing and non-performing notes to provide seller-backed financing to deserving homebuyers.
Our investment strategy aligns with our mission to stabilize affordable U.S. neighborhoods, without displacing deserving residents. We rebuild communities to build opportunities for investors like you.
For more details, click these links:
Find out what is a promissory note is. How is it different from a mortgage?
What is a performing note ? What are the benefits of investing in one?
Why can a non-performing note be a great way to invest?
What do you need to know about seller financing?
How does the note-buying process work, step by step?