4 Strategies for Investing in Real Estate Notes

Investing in real estate notes, presents a unique opportunity for those looking to diversify their investment portfolios beyond traditional real estate. This approach not only allows for passive income but also circumvents the challenges of being a landlord. Below, we’ll explore four strategies that can help you successfully invest in real estate notes.

📈 Strategy #1 — Invest in Performing Real Estate Notes for Slow and Steady Returns

If your goal is to create a reliable income stream with minimal management, investing in performing mortgage notes is the way to go. Performing notes are loans where borrowers are making consistent payments, and the loan is not in default. You can typically acquire these notes at a slight discount, often between 5% to 15% off the remaining mortgage balance.

By stepping into the lender’s shoes, you can collect monthly payments just like a landlord, but without the hassles of managing tenants. This strategy offers returns similar to those of dividend stocks or savings accounts, with a comparable level of time commitment. It’s a straightforward way to earn passive income.

⚠️ Strategy #2 — Purchase Non-Performing Notes, Foreclose, and Flip

For those willing to take on more risk, investing in non-performing notes can yield high returns. Non-performing notes are loans where the borrower has defaulted, and this strategy typically involves several steps:

1. Buy a real estate note that is in default.
2. Foreclose on the property or obtain a deed in lieu of foreclosure.
3. Prepare the property for sale.
4. Sell the property at a discount or keep it as a rental.

This method is labor-intensive but can provide significant rewards. Non-performing real estate notes are often available at substantial discounts, generally between 20% and 50%. If you are comfortable with the risks and willing to put in the work, this strategy can lead to an impressive ROI.

🔄 Strategy #3 — Turn Non-Performing Real Estate Notes into Re-Performing Notes

This strategy blends the first two approaches, offering a balanced risk-to-reward ratio. Here, you start by purchasing a non-performing note at a discounted rate. Instead of foreclosing, you work with the borrower to help them become current on their payments. As the new lender, you can modify the loan terms to make them more manageable for the borrower.

Once the borrower resumes regular payments, the real estate note becomes re-performing. This approach not only avoids the complexities of foreclosure but also provides a more attractive ROI than merely investing in performing notes. You get the benefits of discounted purchases while enjoying the passive income from a performing note.