Mindfully Investing: A Guide to Mortgage Note Investments

Owning real estate “on paper”. When it comes to investing, we often think of stocks or bonds. But have you ever considered investing in mortgage notes? You might be wondering, what are mortgage notes? Well,...

House floating on a scroll of paper Owning real estate “on paper”.

When it comes to investing, we often think of stocks or bonds. But have you ever considered investing in mortgage notes? You might be wondering, what are mortgage notes? Well, in simple terms, they are like IOUs backed by a property. The borrower promises to pay back the loan, and if they don't, the lender can take their property as collateral. It's a unique investment opportunity that more people should know about.

Understanding Mortgage Notes

A mortgage note consists of a promissory note and a security instrument. The promissory note is the borrower's promise to repay the loan, while the security instrument, such as a mortgage or a Deed of Trust, ties the note to the property. This means that if the borrower fails to make payments, the lender can sell the property to recover their investment.

Illustration of a mortgage note Mortgage notes: Understanding the basics.

There are two main types of mortgage notes: performing notes and non-performing notes. Performing notes are where the borrower is making their scheduled payments, while non-performing notes are where the borrower is behind on payments. Non-performing notes require negotiation with the borrower or potential foreclosure on the property.

Advantages of Mortgage Note Investments

Investing in mortgage notes offers several advantages for investors:

  1. Be The Bank: By investing in mortgage notes, you can take on the role of the lender and enjoy the benefits of monthly cash flow.
  2. Predictable Income: Private mortgage notes provide a steady income stream with fixed interest rates and scheduled payments.
  3. No Property Management: Unlike traditional real estate investments, mortgage note investments require little to no involvement in property management.
  4. Higher Returns: Mortgage notes often offer higher interest rates compared to conventional investments like stocks and bonds.
  5. Security: Mortgage notes are secured by the underlying property, providing a level of collateral and minimizing risk.
  6. Diversification: Adding mortgage notes to your investment portfolio can help diversify and reduce overall risk.
  7. Control: As a note holder, you have control over the terms of the loan, giving you a greater sense of involvement and understanding.
  8. Ability to Buy at a Discount: Buying mortgage notes at a discount can increase your yield and provide a higher return on investment.
  9. Low Correlation with Markets: Mortgage notes have a lower correlation with stock and bond markets, offering stability in a volatile market.
  10. More Liquidity Than Many Alternative Investments: While not as liquid as stocks, mortgage notes can be sold if needed, providing a degree of flexibility.
  11. Passive "Mailbox Money" Income: Once purchased, mortgage notes require minimal management, making them a passive income source.

While these advantages make mortgage note investments attractive, it's crucial to consider the associated risks.

The Risks of Mortgage Note Investments

Investing in mortgage notes comes with potential risks that investors should be aware of:

  1. Borrower Default: The borrower may stop making payments, requiring the lender to take appropriate action to recover their investment.
  2. Fraudulent Notes: Due diligence is essential to ensure that the note and its underlying property are legitimate and valuable.
  3. Property Value Decline: A downturn in the real estate market could lead to a decline in property value, impacting the note's collateral.
  4. Interest Rate Increase: Rising interest rates can decrease the value of fixed-rate mortgage notes, making them less attractive to buyers.
  5. Improper Debt Collection: Debt collection must adhere to legal guidelines, ensuring compliance with state laws and protecting borrower rights.
  6. Lack of Liquidity: While mortgage notes can be sold, the market for them is less liquid than other investments, potentially delaying the sale.
  7. Creditworthiness of Note Holders: Buying partial notes from creditworthy note holders reduces the risk of default on the borrower's part.
  8. Real Estate Market Fluctuations: Investing heavily in mortgage notes without diversification exposes your portfolio to real estate market risks.
  9. No FDIC Insurance: Unlike traditional banks, mortgage note investments are not covered by FDIC insurance, requiring careful consideration.

Understanding these risks and conducting thorough due diligence is crucial before investing in mortgage notes.

How to Invest in Mortgage Notes

There are several ways to start investing in mortgage notes:

  1. Buying Notes Directly: Explore mortgage note exchanges or work with mortgage note brokers to find suitable investment opportunities.
  2. Investing Via a Fund or Platform: Consider investing in mortgage notes through reputable funds or platforms that handle the acquisition and management of notes.
  3. Buying Partial Notes: Purchase a portion of a mortgage note from a reputable note holder, reducing the administrative burden and potential risks.

By choosing the appropriate method and conducting thorough research, you can embark on a successful mortgage note investment journey.


Investing in mortgage notes can be a rewarding addition to your investment portfolio. It offers a unique opportunity to generate steady income and diversify your investments. However, it's essential to be aware of the risks involved and conduct proper due diligence. Remember, mortgage note investing requires a deep understanding of the asset class and a willingness to actively manage your investments. With the right approach and a bit of luck, mortgage note investments can offer attractive returns and a sense of financial empowerment.

Disclaimer: This article is for informational purposes only and does not constitute financial advice. Always consult with a professional advisor before making any investment decisions.