Note investing confuses people because the terminology sounds like currency trading when it’s actually closer to being a small bank. As someone who’s bought and managed real estate notes for years, I’ve watched newcomers stumble over the same misconceptions repeatedly. Here’s what actually matters.
What You’re Actually Buying
A promissory note is someone’s written promise to pay money back with interest. Buy the note, and those payments come to you instead of the original lender. The property typically serves as collateral—if the borrower stops paying, you have rights to the underlying real estate.
That’s what makes this endearing to certain investors—you’re not speculating on property appreciation or dealing with tenants. You’re collecting payments that were already contractually agreed to.
Performing vs. Non-Performing
Performing notes have borrowers making regular payments. Predictable cash flow, lower risk, lower returns. These are the vanilla option.
Non-performing notes are where things get interesting. The borrower stopped paying, so the note sells at a steep discount—sometimes 50 cents on the dollar or less. Get the borrower back on track through loan modification, and you’ve bought a performing note at a fraction of its value. Foreclose if necessary and take the property. The math works differently than performing notes, with higher potential returns and higher complexity.
The Actual Benefits
Cash flow tops the list. Monthly payments arrive whether you’re working or on vacation. I know retirees who’ve structured entire income strategies around note portfolios.
Collateral backing provides security that most investments lack. If things go sideways, you have real estate you can foreclose on. Not a guarantee, but meaningful protection.
Control matters more than I initially expected. With non-performing notes especially, you decide whether to modify loan terms, pursue foreclosure, or work out other arrangements. Your outcome isn’t dependent on market movements or corporate decisions.
The Honest Downsides
Complexity is real. State foreclosure laws vary wildly. Loan servicing has regulatory requirements. Due diligence on borrower creditworthiness and property value takes time and skill. The learning curve humbled me.
Default risk exists even with collateral. Legal costs, property maintenance during foreclosure, potential value decline—these eat into returns when borrowers stop paying.
Liquidity barely exists. Selling a note means finding a buyer, which can take months. Need cash quickly? Expect to discount heavily.
Getting Started Without Getting Burned
Education comes first. Read everything you can, join forums where active note investors discuss deals, find a mentor if possible. The American Association of Private Lenders has resources worth exploring.
Start with performing notes before chasing discounted distressed paper. Lower returns, but you learn with lower stakes.
Professional guidance—attorneys specializing in this area, accountants who understand the tax implications—pays for itself by preventing expensive mistakes.
