Note Investing – The Lesser Known Way to Gain Exposure to Real Estate
Have you wanted to break into the real estate market? Due to the strong interest in this market, funds, trusts, and other investment products that don’t require a huge initial investment are becoming more popular.
Investing in several different financial products within the real estate market can limit your risks.
Notes are an excellent addition to your portfolio. They are easy to purchase, do not require any management on your part, and are safer than other financial products connected to the real estate market.
Purchasing a note is the equivalent of owning a part of someone’s debt. In the context of real estate, buying a note means you own a portion of someone’s mortgage.
Traditionally, insurance companies and pension funds would buy large quantities of notes. However, this product is becoming a more common option for individual investors, thanks to lender’s clubs who specialize in connecting individual investors with future homeowners in need of financing.
Benefits of Note Investing
There are several advantages to adding notes to your portfolio:
- Notes are secured liens. The home is collateral for the loan. If the borrower is unable to make payments, the home will be repossessed by the lender. The risks of losing your initial investment are low compared to other real estate products.
- Earn a monthly income with notes. These investments typically pay out between 6% and 20%, depending on the interest rate of the mortgage you purchase a portion of. You can use this income to purchase more notes or choose to invest in other products to diversify your portfolio.
- Notes are easy to manage. You can buy or sell notes online through a lender’s club or investment service. Compared to managing a property, notes hardly require any time or effort.
- You can purchase discounted notes. This is a great way to get started with note investing with a small budget or to generate a profit quickly. This technique involves purchasing notes at low prices and reselling them once they gain value.
- The value of a note goes up as the value of a property increases. You can choose to keep a note to earn a monthly income or decide to sell it for an immediate profit once the value of the property goes up.
Disadvantages of Note Investing
There are also some downsides to note investing:
- There are fees associated with note investing. Lender’s clubs or investment services charge their clients for each transaction performed. You can purchase notes for as low as $10 or $15, but these fees can go up depending on the service you use. Fees can quickly add up if you buy and sell notes on a short-term basis.
- Notes are generally long-term investments. Unless you can sell a note within a short time-frame because the property gained value, your best strategy is to keep a note for as long as the homeowner makes payments on their mortgage so you can earn a monthly income.
- Beware of notes for overvalued properties. Overvalued property is common in the real estate market. Since the value of a note is a direct reflection of the value of a property, some notes are sold for more than they are worth.
In the end, adding some notes to your portfolio is a low-risk way to generate passive income for the long-term. Choose a reliable service to purchase your notes and learn more about the prices on the real estate market to avoid overpaying for these investment products.