Many people think of a mortgage as a vehicle for buying a home and may not realize the extraordinary investment potential in buying mortgage notes. Investing in mortgage notes is a SIMPLE, secure way to diversify your portfolio and increase cash flow, offering reliable returns without the effort of other real estate investments.

Easy, asset-backed, passive income? If you think it sounds too good to be true, you are not alone. Many people approach mortgage note investing with caution when they first learn of it. After all, if it was as good as it sounds, would not you hear about it more often?

Not necessarily. As the saying goes: money talks, but “wealth whispers”

Who should consider investing in mortgage notes?

If you want to diversify your portfolio and generate passive income with real estate investments but do not like the hassle of flipping and renting, buying mortgage notes may be just what you are looking for.  

If you’re new to the world of buying and selling mortgage notes, you may already understand what a mortgage and note are. However, it’s helpful to define these terms, and others associated with investing in notes and mortgages, in context.

What is a mortgage?

A mortgage is a secured loan that uses real estate as collateral. Most home buyers do not have the liquid assets needed to buy a home outright and need a loan to supplement their down payment. Mortgage lenders (typically, but not always, banks) fund the purchase for approved borrowers who then repay the loan, with interest, over a period of 10 - 30 years. A mortgage attaches a lien against the property until the loan is repaid according to the terms laid out in the note.

What is a mortgage note?

Mortgage notes are not the same as a mortgage, though both secure a loan. When a borrower takes out a mortgage, the lender produces two documents: the mortgage (see above) and the mortgage note, which is also called a promissory note. The mortgage note can be seen as a “promise to pay” and lays out the terms and conditions of the loan.

Why Should I diversify my Investment Portfolio

Diversification has several benefits for you as an investor, but one of the largest is that it can improve your potential returns and stabilize your results. By owning multiple assets that perform differently, you reduce the overall risk of your portfolio, so that no single investment can hurt you too much. It’s this “free lunch” that makes diversification a truly attractive option for investors.

Because assets perform differently in different economic times, diversification smoothens your returns. While stocks are zigging, bonds may be zagging, CDs provide consistent returns. Investing in mortgage notes are much the same in that they have stable payments. Property values may fluctuate but the mortgage amount, and payments to the investor, remain the same.

In effect, by owning various amounts of each asset, you end up with a weighted average of the returns of those assets. Although you won’t achieve the startlingly high returns from owning just one rocket-ship stock, you won’t suffer its ups-and-downs either.

Investing in a Fund that buys mortgage notes.

Many investors buy individual notes. While this can be a good strategy it also requires a degree of management. The note holder must work with the servicer, sometimes the borrower, and be familiar with legal notification requirements, etc. Investing in a fund that buys mortgage notes avoids all that since it’s the funds responsibility to manage the portfolio. The investor is also buying a portion of the entire note pool, rather than an individual note, which diversifies the risk.