Top 10 Tips for investing in real estate Mortgage notes

Investing in real estate mortgage notes can be a wonderful way to earn passive income, grow your retirement savings, diversify your portfolio, and/or become an active real estate investor. But just like any investment, it comes with it’s own set of challenges. The following 10 tips will help new and old note investors face them successfully.

10. Be professional

If you’re going to invest in mortgage notes, no matter the scale, you should look and act professionally. Start a company and name the company well (tip: your business name should sound like a big company, not a small mom and pop shop run out of your living room). Develop a website, a well-designed logo, and establish a brand. When you interact with potential investors, note sellers, note buyers, or industry professionals, present yourself in a respectable and professional manner.

9. Develop a marketing plan

The note business is all about connections. Whether you invest in first liens, second liens, institutional loans, or seller-financed loans, you have to market to find inventory. Develop a plan that you can consistently implement which could include cold calling, email marketing, online lead capture, creating quality online content like Youtube videos or blog posts, or direct mail. If you’re not marketing, you’re not getting deals or investors. 

8. Use the professionals

I am a big proponent of utilizing professional services. There is no way I can know it all. I hire experienced and knowledgable professionals to help me with my business including a bookkeeper, an accountant, lawyers (in every state I own notes and others for contract law), servicing company, closing agent or title company, realtors, and more. Can you service your own notes? Yes. Should you? No! By utilizing qualified, competent experts, I can focus on the important parts of my business while letting the professionals do what they do best.

7. Do thorough due diligence

Due diligence is a blanket term for conducting research on anything. This type of underwriting is essential when investing in real estate mortgage notes. Unfortunately, new note investors rarely conduct as thorough due diligence as they should because they lack an understanding about what to research or how to do it properly — or both. This leads many to overpaying for note purchases, selecting investments with unanticipated risk exposure or even buying worthless assets. Never take short cuts on underwriting or assume you cannot learn how to improve your processes. 

6. Protect yourself

Every investment comes with risk and note investing is no different. Note investments have risk exposure to borrowers filing bankruptcy or other lawsuits, poorly originated or missing paperwork, lapsed property insurance, or delinquent property taxes. You must first understand how all of these factors could affect your investments and have a plan in place to protect yourself accordingly.

5. Operate as a big company

Run your note investing business as an actual business, whether you’re buying one note a year or hundreds. Too many people view note investing as a “hobby” and do themselves and the note industry as a whole a great disservice. Mistakes, inefficiencies and unfavorable reputations follow poorly run businesses. You need all the skills and resources every small business owner relies upon for success, regardless how “small” your business actually is. 

4. Be flexible

Don’t pigeon hole yourself into just one way of investing in mortgage notes. Liz and I both started investing in non-performing notes (NPNs) in the wake of the Great Recession. In 2010 – 2013, NPN inventory was high and prices and competition were low. By 2019, the longest US economic expansion in history made mortgage delinquency drop to it’s lowest recorded levels and NPN inventory dried up. A few months later, the 2020 pandemic flipped the world on it’s head, leading to a US unemployment rate of 14.7% and causing 4.7 million US borrowers to ask their lenders for help with their mortgage (current at the time of this writing). The note investing market is constantly changing because the US economy is constantly changing. If you aren’t flexible and able to invest in the opportunities available to you — not just the ones you prefer — you may find yourself out of business. Diverse skills that allow you to manage whatever comes your way is the best predictor of success as a note investor. 

3. Network with the right people

Networking is a crucial part of note investing. Who you know will not only affect the quantity, quality and pricing of the deal flow you see, it also determines whether you will need to figure everything out on your own or have others you can rely upon for assistance. Of course, there are tire kickers, idiots, and scam artists in every industry and you have to do due diligence on the people and companies you work with before you dive in. But establishing a flow of quality, well priced deal flow as well as a trusted team of other investors and vendors that you can share information and insights with is priceless. 

2. Know the state and local laws

Legislation that affects investing in real estate notes differs from state to state and sometimes even municipality to municipality. Some states conduct foreclosures judicially — in court, with a judge, taking as long as it sounds like it will take — while others are done are non-judicially with no judges, no courthouse, just a trustee moving it (relatively) quickly through the process. Legal differences also surround municipal liens. Some counties attach unpaid sewer, water, or electric bills as liens to the underlying property so if you foreclose, these expenses become your responsibility. Other counties attach these liens to the account holder so they will not affect your expenses no matter what the borrower does. Still other differences involve whether or not a state requires note investors to be licensed to do business in that state, how tax foreclosures are handled, and whether or not a foreclosed borrower can “redeem” their rights to their home by paying off their debt after the foreclosure. If you plan to buy mortgage notes, it is crucial you research the laws of each state you will invest in and speak with an attorney licensed in that area before you purchase any assets there. 

1. Get a good education

Hands down, the best tip we can give anyone who wants to start investing in real estate mortgage notes is to get a good, thorough education. There are a lot of free resources about investing in real estate notes, including videos, blogs, podcasts and e-books. They vary in quality — from shameless sales pitches to content rich materials — so relying solely on these resources can be tricky. But patching together free resources can leave you with gaps in knowledge and you have limited access to those who created these tools for follow up questions. Joining a comprehensive, well-designed training program that not only takes you from start to finish but also offers a forum for discussion and continued education on changes in the market and the economy will help you avoid losing money on rookie mistakes and save you a lot of time and headache trying to re-invent the wheel. 

Keep in mind though that high prices do not guarantee quality in education. And not every self-proclaimed “expert” actually has experience doing what they are teaching. So do not forget to do a background check on any educator you choose to give your money. Make sure they don’t have a long history of being sued by their investors or are disbarred lawyers trying yet again to get around the rules. Ask for reviews from  current students, research forums like BiggerPockets to find out who other investors trust and  recommend. Even check county records for the entity the do business under to see if they have actually invested in notes!

Be sure to that any training program you join has the following characteristics:

  • Run by actual investors who are still investing so their knowledge is current and applies to the market you will actually be investing in rather than historically good or bad markets. 
  • Taught by someone whose business is focused on investing and training instead of someone who runs a training empire with little time or resources left to maintain an investment portfolio. 
  • Clearly articulates what you will learn and how that content will be delivered to you.
  • Provides a community where questions and discussions are encouraged. 

Want to learn more about note investing?

Even as the economy heads into rough waters, note investors are positioned to do very well during these uncertain economic times.

If you're interested in learning how we are able to invest and profit by creating, buying, and selling mortgage notes regardless of the economic climate, visit our website, where we show you how you can become a note investor through our online note investing education program, Note Investing Academy.