If you’ve found this page, you’re most likely asking, “what is a note and how does it benefit me?” Let’s start by defining what a note is.
Quite simply, a note is a promise to pay. More specifically, it’s a formal promise to pay that usually involves a contract. In fact, that’s where the name and definition of promissory note comes from. While each agreement may meet a specific legal definition, in general, the terms note, loan, mortgage, etc. are used interchangeably by most people. A note is the agreed contract for a loan.
Most notes we’re familiar with are paid back in the form of a monthly payment for a period of time. (vehicle loans, layaway, credit cards, etc.)
Probably the largest note most people ever think about is a real estate note, sometimes called a mortgage, and that’s what we’re talking about here.
Notes and Mortgages
Think about how a mortgage works: When you want to purchase a home, you usually give the seller a down payment and borrow from the bank to pay the remaining value of the house. You’ve made a promise to pay the bank the rest of the home’s value over time. Then you make a monthly payment to the bank to pay down the loan.
This works for you, but it’s a great deal for the bank. The bank now has a passive monthly income stream that is supported (collateralized) by the house itself.
Here’s an insider’s tip: Collateralization is why an appraisal is ordered when you’re buying a house. The bank wants to make sure to get their money back if there’s a lapse in payments. If the buyer breaks their promise to pay, the value of the house is the security for the bank to recoup their money.
One of the beautiful things about mortgage notes is that the bank has several options to help recover their capital—foreclosure is only one.
Investing in Notes and Mortgages
When an investor (like you or me) acquires a note, we become the bank. And we get all the same options a bank has at their disposal. Yes, you heard that right. We become the bank.
So, note investing is the paper side of real estate investing and the house is the collateral or safety net for our investment.
You can invest in notes or mortgages in the secondary market. These loans may be bank originated, or they might be seller-financed mortgages. Either way, they can be a passive income stream.
Now that you understand what a note is, let’s move on to the second question.
What are the benefits of note investing?
A note is very beneficial to those who want truly passive, monthly income. Notes reduce or eliminate pesky headaches that come along with other investments like being a landlord.
Think about this: when a homeowner has an issue like, say, a backed-up sewer line, they don’t call the bank to fix it. They call a plumber. The bank never knows about it! (Unless the house floats away and the insurance company pays off their loan.)
Whatever the normal maintenance issues, the bank doesn’t have to handle it. The bank just gets a monthly payment. This is what most investors truly want.
Imagine keeping more money in your pocket every month. Or not having to deal with tenants, managers, or contractors. The list goes on and on.
Investing in Notes for Passive Income
Our series of investor resources will cover these topics in more detail. For now, the biggest benefit most note investors experience is getting more of their time back to do what they want to do. I’m talking about true independence.
What would your life be like if you received money every month no matter where you were or what you were doing?
In conclusion, think about who has the biggest buildings in a large city skyline—its banks. Banks own notes, not the real estate. But real estate is the failsafe in the event of a catastrophic event.
I have one final question for you: at the end of the day would you rather have a business, or would you rather have a portfolio? Guess what? The banks have portfolios.
This is the question we will dissect over the next few articles. Thanks for reading.
Our next article will begin a series comparing notes to other real estate investing methods, starting with Notes vs Rentals.
If you have questions about how you can become a note investor, please contact us.