How to Be Successful and Make Money with Note Investing

Whether you
know it or not, you are probably already involved in note investing but on the wrong side of it. Investing in notes is the process of buying debt in the form of
credit cards, student loans, mortgages, or car loans. But instead of making
payments, you collect payments from the borrower, which include a higher than
average interest rate.

Many
investors think that note investing
sounds too good to be true, or may even think it is a scam. This could not be
further from the truth. Note investing
is simply the process of purchasing debts that borrowers owe. Once you purchase the debt, you earn interest each month until the debt is paid in full by the borrower. This interest can range anywhere from 3% on a mortgage note to well over 15% on a debt like a credit card. The interest rate is not subject to
changing market conditions so you earn the same rate over the life of the loan,
which can be anywhere from a few months to 30 years, depending on the terms of
your investment.

While there
are many types of note investing like credit cards or car loans, there are some specific advantages that come with investing in real estate notes. Investing in notes that are tied to the real estate market is very similar to trust deed investing. Basically, you purchase a mortgage debt from a bank. The bank benefits because there is less of a risk of loss in the case of default because it has capital from you. You benefit because you can now start earning the
interest that is paid by the borrower each month. While this may be a relatively
low rate, it is usually a high payment due to the amount of money involved in the
transaction. Even at 3.5%, you can earn hundreds every month compared to a
credit card note which may have a higher interest rate but generally a lower
balance so the monthly interest payment is less.

Benefits of Real Estate Note Investing

As discussed
above, high monthly payments are one key benefit of investing in notes that are related to real estate. In addition to
high payments, there are several other benefits that are unique to real estate note investing.

Borrowers are less likely to default completely on
their home loan. While foreclosure does happen and is a risk, most borrower are emotionally tied to their home. Even if other debts end up being defaulted on, they are less likely to want to risk losing their home so a mortgage payment will often be a priority, even during times of financial stress.

The note is backed by a real, tangible asset. In the event
of default, the property can be foreclosed on and some of your investment can
be recouped. This is simply not the case in many other types of note investing. Take credit cards for example, if a borrower defaults, his credit will be impacted but credit cards
are unsecured debt, meaning that there are no physical assets that can be used
to recoup your funds.

3.
Note investing can be very profitable. Especially if you buy a non-performing note and spend time to rehab it. This means you buy
a note that is close to or in default and renegotiate the terms of the loan
with the borrower to avoid foreclosure. You then earn interest and the note
itself becomes more valuable. In some cases, these notes can be worth nearly
12% interest each month.

4.
Less competition. Investing in notes is a niche investment market. There are only a few private equity firms and hedge firms that use this investment strategy and the pool of
individual investors is even smaller. This means no bidding wars and often puts
you in a great position to negotiate price and terms.

5.
Easy, passive investing. You can have a financial
company manage your note for you for a flat fee that is usually quite small. In
addition, if the note is performing there is almost not managing necessary. You
get to sit back and earn money every single month.