Paper money investing gets dismissed as “just collecting old bills” by people who’ve never looked at the returns. As someone who started buying notes as a side hobby and watched it become a meaningful part of my portfolio, I’ve had time to sort out what works and what doesn’t. Here’s the honest breakdown.
What Note Investing Actually Means
We’re talking about promissory notes—legal documents where someone promises to pay a specific amount, usually with interest, at some future date. The notes can be backed by collateral like real estate or vehicles, or they can be unsecured and rest entirely on the borrower’s word and creditworthiness.
Buy a note, and you step into the lender’s shoes. Those monthly payments start coming to you. That’s the appeal in its simplest form.
The Upside That Draws People In
Steady cash flow tops the list for most investors. Unlike stocks that might pay dividends quarterly (or not at all), performing notes generate monthly income. I know several retirees who’ve structured entire income strategies around note portfolios. The predictability appeals to them.
Collateral backing provides security that pure equity investments lack. If a mortgage note borrower defaults, you have rights to the underlying property. Not a guarantee of getting your money back, but a meaningful safety net compared to buying shares in a company that could go to zero.
Portfolio diversification matters more than I appreciated when I started. Notes don’t move in lockstep with the stock market. When equities tanked in early 2020, my note income kept arriving.
Discount purchasing can produce outsized returns. Distressed notes—where the borrower has missed payments—sometimes sell for 50 cents on the dollar. Get the borrower back on track or successfully foreclose, and the return math looks very different from collecting interest on a performing note.
The Downsides Nobody Advertises
Default risk is real. I’m apparently one of those people who reads every page of due diligence documents, and I’ve still made mistakes. One note I bought had collateral that appraised $40,000 lower than the purchase documents suggested. The borrower stopped paying eight months in. Lessons learned expensively.
Liquidity barely exists. Selling a note means finding a buyer willing to pay fair value. That can take months. If you need cash quickly, expect to discount heavily. This isn’t money you should need on short notice.
Complexity exceeds expectations. Understanding note servicing, foreclosure laws (which vary wildly by state), borrower rights, and collateral valuation takes time. The learning curve humbled me despite thinking I understood finance reasonably well.
Regulatory landmines exist. Depending on the note type and your state, various rules apply. Violating lending regulations—even accidentally—creates liability. Professional guidance early on saves headaches later.
Getting Started Sensibly
Education comes first. Read everything you can about note types, valuation methods, and due diligence processes. Join forums where active note investors discuss deals and problems. The American Association of Private Lenders has resources worth exploring.
Start small with performing notes before chasing discounted distressed paper. The returns look less exciting, but the learning happens with lower stakes.
Professional advisors—attorneys who specialize in this area, accountants who understand the tax implications—earn their fees by preventing expensive mistakes. Budget for expertise before budgeting for notes.
Bottom Line
Note investing works for some people and portfolios. The passive income potential is genuine. So are the risks and complexity. Go in with realistic expectations, proper education, and enough capital that early mistakes don’t derail your financial life.
