Note Investing 101: Things You Need to Know

Setting-up notes is one of the ways to engage in real estate investing. Note investing happens when a buyer of a real estate property has no sufficient money to purchase the subject property. In this transaction, the buyer will contract a loan and execute a promissory note. The note will serve as a security or a promise to fulfill the corresponding obligation.

Here are the things you need to know about note investing:

Note Investing Process

As a process, note investing involves technicalities and legalities depending on the State where the contract is executed. In a nutshell, the procedure of note investing includes the following steps:

1- Entering into a contract

As a process, note investing involves technicalities and legalities depending on the State where the contract is executed. In a nutshell, the procedure of note investing includes the following steps:

2- Execution of a note

The buyer will execute a note which will be secured by a mortgage. The buyer is now the owner of the property, subject to the repayment of the loan based on the terms agreed upon.

3- Transaction of a note

The lending institution (private person or a bank) will sell the note to investors for cash. The payment will now be given to the investor as the buyer pays the note.

Performing Note vs Non-Performing Note

In note investing, you will encounter the terms “performing note” and “non-performing note”. Familiarizing yourself with these concepts will help you get started in engaging in this field.

Performing note

A performing note means the property owner makes regular payment based on the terms of the contract. Buying a performing note opens the opportunity to receive passive cash flow usually every month or in accordance to the repayment schedule agreed upon by the parties.

Non-performing note

A non-performing note means the property owner or holder is in default of making payment. In this case, the owner cannot repay anymore based on the terms of the contract. Investing in non-performing notes is also an attractive option because it will give you a better chance to take the asset at a discount.

Sources of underlying finance

If you will engage in seller financing or note investing, it is good to know the sources of underlying finance. Some of the common sources are as follows:

  • Conventional loans, lines of credit
  • Professional connection, friends, family and community
  • IRA investors
  • Private lenders or hard money

If you are interested to invest and learn more about notes, we have partners for you here in our REIQ Notes. You may also check the hot trends in real estate by visiting our blogs.

Credits:

Kristin Gerst has been a Real estate investor since January 2005. She has invested in multi-family and single family real estate projects. Her professional experiences include acquisition, design, rehabilitation, flips, owner financing, mentoring and investor consulting.

Steve Liang is the Co-founder and CEO of Real Estate IQ. He is a  national speaker and a member of the Real Estate Advisory Board of North Lake College. Some of his achievements include being the REIQ’s Market Leader in Real Estate Intelligence Augmentation; co-founder of Real Estate Deal Finders Meetup, which hosts over 20 monthly real estate networking and deal-finding training in Texas; and a goal-setter and motivational speaker that helps entrepreneurs to unleash their potential and achieve their goals. Steve has spent most of his career practicing leadership, management, marketing and strategy execution.

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