Many consider note investing to be one of the more mysterious parts of real estate, but in 2019 it’s starting to become more common as more people join the industry.
If you attend real estate meet ups you might occasionally hear people talk about purchasing notes so they can “be the bank” or “invest in real estate without the headaches of tenants, termites, and toilets.”
I’m a note investor myself and that’s actually how I first started investing in real estate.
Note investing has been good to me so I wrote this guide to provide a foundation for you to learn how to start earning income as passively or actively as you want by investing in notes.
This post will probably always be a work in progress, so I’ll be publishing it as I write it. My apologies if you view it in its early stages when it’s still very incomplete!
If I’ve made an error, missed anything, or you have a question about note investing please contact me and I’ll do my best to get this guide updated.
What is a note?
A note (also called a promissory note) is a written document signed by a borrower that formalizes a promise to pay a lender back.
Think of it as an IOU.
When you buy a house you can buy it outright with cash, or you can buy it using a loan.
If you take out a loan, you’ll need to sign a bunch of documents, two of which are a note and a mortgage.
As I mentioned before, the note is a promise to pay the lender back.
This promise is secured by the mortgage, which is a legal document that gives the lender the right to take back the property if the borrower does not repay the loan as agreed.
A few other things you should know:
1. Because a note is secured by a mortgage, you’ll often hear a mortgage referred to as a “security instrument”.
2. Depending on the state you’re in, the note might be secured by a mortgage, or it might be secured by a deed of trust.
Here’s a very very high level overview of the difference:
When you buy a house with a mortgage the legal title transfers to you.
When you buy a house with a deed of trust, the legal title transfers to a third party (called a trustee) until the debt is fully paid.
We’ll talk more about deeds of trust later, but until then check out the Deed of Trust (real estate) Wikipedia article if you need more info.