Why Invest In Mortgage Notes?

With interest rates on the rise, savvy investors are looking to cash in and max out on the amount of passive income they can earn from their investments.

But as is always the case, savings rates have not risen as fast or as much as the cost of borrowing.

With that in mind, many investors are looking for alternatives to dividend stocks, bonds, and cash deposits that pay a better rate of return.

I have personally been investing in private mortgage notes since 2010, and right now the timing has never been better.

Here are my top eight reasons why you should considering investing in mortgage notes right now in 2023.

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 1. Diversification

Diversification is the bedrock of risk management.

According the the BSE Institute, “spreading investments across different assets, sectors, or geographic regions to reduce exposure to a single risk”.

Investing in mortgage notes allows you to add multiple layers of diversification across geographical locations, property types, types of note, and borrowers.

By gaining exposure to even just one note you are adding an additional asset class to your portfolio, which can have a significant impact on overall risk.

 2. Flexibility & Control

Owning a note make you the bank, and as the bank, you get to call the shots if something goes wrong with the underlying investment.

If your borrower is having issue making payments there are multiple options available to you as the lender, including but not limited to loan modifications, cash for keys, deed in lieu, and ultimately foreclosure.

Ultimately, owning and managing a mortgage note is far more flexible than an equivalent investment in physical property such as a rental.

 3. Passive Income

If earning as much passive income as possible is your thing, then investing in mortgage notes should really be a serious consideration.

Outside of  CDs and some listed stocks such as REITs, MLPs, BDCs, performing mortgage notes can be excellent tools to boost your overall portfolio income.

A performing note with a good borrower will deliver regular monthly cash payment direct into your account, with minimal (mostly zero) oversight and management.

And if you really want to make your income as passive as possible, you can even use a servicing company to collect your monthly payments for you!

 4. Less Hassle

While obviously being a great investment, owning physical real estate can be hard work. Believe me, I own 75 out-of-state rental properties.

There’s always some kind of drama to deal with. Be it vacancies, major damage and repair, routine repairs and maintenance, or property management issues such as late rents (or no rent), and evictions.

Being the bank by investing in mortgage notes means you can sit back and let someone else deal with all that.

After all, when a faucet breaks in your house, you don’t call Wells Fargo to come fix it, right?

As a note investor, you just collect your monthly payments (or have them collected for you), and stack up the dollars.

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 5. Better Liquidity

Liquidity – the ability to turn your asset into cash – should be a consideration for every investment you make.

While physical bricks and mortar can often take a considerable amount of time and resources to sell, especially for the best possible price, mortgage notes are far more liquid.

You can sell notes within 24 hours (to the right buyer). You can even sell part of a note (known as a partial), if you want to raise some cash but still keep most of the passive income for yourself.

Finally, you can also borrow against a mortgage note just like a physical property.

With all these options to create partial or totally liquidity in a much shorter timeframe than physical real estate, mortgage notes are a clear winner in my opinion and experience.

 6. Multiple Investment Options

Mortgage notes investing offers a wide range of investment options and strategies to suit every type of investor.

For income seekers there are performing mortgage notes.

For those looking for a big potential capital gain, or to ultimately own real estate, there are non-performing mortgages.

There are also notes with 1st position liens, and 2nd positions liens, with each carrying its own unique set of risks and advantages.

Mortgage note investing is one of the most diverse alternative income sectors I have been involved in, and there really is something for everyone.

 7. Less Money Required

While it is possible to buy real estate for very little money – through tax sales or foreclosure auctions for example – it is far easier to find low dollar value mortgage notes for sale.

I have seen notes available for just a few hundred bucks through millions of dollars and everything in-between.

A quick scan of some of the online note trading platforms such as Paperstac will reveal mortgage notes for sale to suit every budget.

Some investors also raise money form other investors to buy larger mortgage notes using less of their own money, sharing the income and returns from their successful investments.

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 8. Excellent Return on Investment

This is the biggest and best (and most relevant) reason why to invest in mortgage notes right now in 2023…

With interest rates n the rise, mortgage borrowing rates are peaking around 7%. the private mortgage market is no different, and as risk-free returns rise for asset likes CDs and treasuries, it become to possible to buy private mortgage at a discount, or originate loans with comparative higher interest rates.

Now really is a great time to be a lender or mortgage note investor!

A good quality performing mortgage note with a decent borrower and solid lending terms can pay anywhere from 6% p.a. to 12% p.a.

But the your return on investment from mortgage notes doesn’t begin and end with the interest rate. This is where things get interesting…

It is often possible to buy mortgage notes at a discount to the face value.

This purchase discount effectively amplifies your return on investment, both in terms of yield and capital repayment.

In simple terms, a mortgage note with a 8% interest rate purchased with a 20% discount to the unpaid principal balance yields 10% p.a.

Not only that, the borrower ultimately pays back the original undiscounted principal as well! Double whammy!

Conclusion

So, there you have it… eight pretty good reasons why to invest in mortgage notes right now in 2023.

Whether you’re looking for more passive income to add to your retirement account, or perhaps you just want to diversify your investments outside of volatile and uncertain financial markets, there has never been a better time to start investing in mortgage notes.

Finally, remember to always do your due diligence! By far the best investment you will ever make is in your own knowledge and education.

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