How to Make Money with Real Estate Mortgage Notes in 2021?

How to Make Money with Real Estate Mortgage Notes in 2021?

Mortgage notes are one of the best available investment options in the real estate category. However, it’s easier said than done, as real estate mortgage note investment comes with its own set of challenges. Identifying the right real estate mortgage note that will generate a steady passive income might be tricky. 

Reading this article will help you gain an understanding of the advantages of investing in real estate mortgage notes. 

Investing in real estate or mortgage notes is buying real estate without property management or a landlord where the homeowner, instead of the bank, pays the lender. You collect a monthly payment, including both the interest and principal, when you purchase a mortgage note. It is a constant stream of revenue like you would get from a rental house, except unlike a landlord, there is no need to manage the property.

Investing in Real Estate Mortgage Notes

Before going into the dynamics of real estate mortgage notes, let’s understand performing and non-performing notes.

  • A Non-Performing Note (NPN) is a note where the borrower does not pay as agreed. Non-performing loans include borrowers who are at least 30 days or more behind on their mortgage. 
  • A Performing Note is a mortgage loan in which the borrower pays his dues on time. Essentially, without missing any payments, the borrower has made and continues to make their mortgage payments.

Making Money on Performance Note

You can often profit from the interest accrued in a performing real estate mortgage note. To clarify, interest is the rate a borrower pays the lender to borrow the funds for the property purchase. The higher the interest, the higher the borrowing cost and the more the lender earns. The lower the interest, the cheaper the borrowing rate, and the less the lender makes on the borrowed principal sum.

Any time mortgage payments are made to the loan, a portion is charged to the principal and interest (P&I). The largest portion of the monthly P&I going to the interest at the beginning of the loan, and the largest portion paying down the principal at the end of the loan. This helps lenders to receive the bulk of their interest before paying down the principal balance.

When you create a mortgage note or purchase a performing loan at face value, you’re earning from the interest you receive while you’re holding a loan. If you keep the loan to maturity, the interest rate on the loan is the return rate you will receive. However, if you buy a note at a discount of how much the principal is due, the return increases. Platforms, like Paperstac, make buying mortgage notes at a discounted price much easier to do.

Making Money on Non-Performance Note (NPN)

The chances of you getting a non-performing note at a discounted price are higher. Performing notes sell between 75 and 100 percent of their present value, and the sub-performing notes can be found at 50 to 80 percent of their present value.

With the discount they receive, some real estate investors prefer to concentrate exclusively on investing in non-performing notes. Often, non-performing loans are offered at a significant discount. This can range from a nominal value of 30 to 50 percent or more. The bigger the discount of non-performing notes, the higher the return. This discount gives the note investor the versatility to work with the borrower while still receiving a high return.

There are three ways for an investor to recoup their investment on non-performing real estate mortgage note:

  • Foreclosure 
  • Deed in lieu 
  • Modifying or adjustment of terms


When an investor buys a mortgage note, they are secured by the property. They have the right to take civil proceedings to obtain title to the property and recover the money owed to them. Eventually, the property will go to a public auction at a foreclosure sale where third-party bidders will bid on the property. If it sells at auction, the lender receives a part of the proceed from the sale. If it does not sell at auction to a third-party buyer, it becomes a real estate owned (REO) property, and the lender is responsible for the sale and preservation of the property as a way of recovering its investment. Foreclosure varies from state to state and can last from a few months to several years.

Deed in Lieu (DIL)

A Deed in Lieu (DIL) is an alternative to foreclosure, in which the lender still gains title to the property, and the borrower signs the deed to the lender in lieu of foreclosure. For homeowners who have little interest in preserving the home and potentially owe more than the home is worth, this can be a great choice, as it keeps a default from their credit history and helps them move on from their delinquency. When a DIL is executed, the borrower’s debt is absolved, and immune to any liens or encumbrances, the lender is placed on the title. For this purpose, the DIL is typically enforced by investors only when the title of the property is free of any other liens or encumbrances that might obstruct the investor’s ability to resell the property.

Modifying or Adjustment of Terms

For both the borrower and the lender, this is by far the most desirable choice. As it helps the homeowner stay in their home and the investors to gain cash passively without the hassle or cost of maintaining or selling the home. This is particularly feasible if the note is bought at a discount since the lender has more room to be flexible with the loan terms.

By lowering the interest rate, amortizing the loan out to 30 years based on the current balance, forgiving a portion of the balance, or adjusting the type of loan, the lender may negotiate with the borrower to reach a feasible monthly payment.

Do you need help investing in real estate mortgage notes? Reach out to our team Or schedule a chat with TJ Osterman, Co-founder, and CEO of MWMfund. Also, check out The MWMfund Learning Center for more educational content.

Click here to learn more about real estate trends in 2021 and what to invest in right now.

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