Want To Invest In Mortgage Notes? Here’s How!

Investing can be a challenging thing. The numbers are always changing and there’s just no sure foundation. Where do you invest, how much do you invest, how do you know the right investments? 

There are endless questions about how to properly invest and not risk losing all of your money. The thing is, the right investments can vary from person to person. There are so many options from choosing items with low risk to high risk. 

The types of investments you can make vary greatly as well. You can invest in stocks, bonds, options, funds, notes, and more. How can you possibly choose? Have you taken a look at mortgage notes yet? These are quite unique in style and they offer an advantage all their own. 

Whether you’re here because you are interested in knowing more about mortgage notes or you’re looking for tips on how to choose a good mortgage note to invest in, we’ve got your back! 

Mortgage Notes Explained

Mortgage notes investing takes some research and investigation in order to make a fully-informed decision on your investment. If you’re not yet familiar with mortgage notes, you’ve come to the right place. 

Before you learn how to invest in mortgage notes, you should understand just what it is you are looking at investing in. 

Purchasing mortgage notes puts you in the field of property management without actually requiring you to purchase a property and manage it. These notes actively invest in real estate pieces. You don’t typically choose the exact real estate but rather purchase a bundle of real estate pieces as an investor. 

You then earn a return based on your investment. 

Are you familiar with what a mortgage is? It’s basically secured financing for the purchase of a home. This is done through a lender and the borrower signs a promissory note, promising to pay back the principal balance plus interest in set installments. 

There are specific terms agreed upon between the borrower and the lender and then both parties sign the agreement. The part that determines the timeline, the payments, the amount, and the interest is the note. 

The mortgage is a document offering collateral to the lender. In this case, the lender is letting you borrow the money for the home purchase and you are promising the lender can take the house back if you don’t pay. 

Mortgages can be taken on multiple property types. Here are a few:

  • Single-family residence
  • Multiple-family residence
  • Apartment complex
  • Townhomes
  • Commercial buildings
  • Industrial buildings
  • Strip malls

These are the most common forms of mortgages but there are others out there as well. 

Investing in mortgage notes does not mean that you are taking over the loans or the mortgage. That part remains with the lender. Purchasing mortgage notes means that you purchase the debt and secured property interest. As the mortgage note holder, you can then receive principal and interest payments. 

This is a good way for a person to be able to invest in real estate without having to take on the responsibility of taking care of the property or being a landlord to the property. You’re simply backing the property owner. 

Many people use mortgage notes as an inexpensive way to invest in real estate. It’s a plausible source of passive income but there are many things that you should be aware of. 

Where and How to Buy Mortgage Notes

Mortgage notes are typically sold through banks. There are various ways to invest in mortgage notes. You can seek out individual mortgage notes and invest that way or you can look for mortgage note investments that are made up of bundles of mortgage notes. 

The best way to buy mortgage notes is to work with your investment professional. They have databases that give them access to options for you. This process would work very similarly to purchasing something like a bond or a brokered CD. 

With this process, they can quickly search through a database for mortgage notes available for purchase as well as the terms of the note. They can see the income and the rating and can sort through a myriad of options. An experienced investor might be able to do this on their own through their investment platform. 

You can also actively participate in mortgage note investments by investing in things like mortgage note funds or REITs. A mortgage note fund would be a mutual fund that invests in mortgage notes. In this case, you’re purchasing a shareholder-type portion of a bundle of mortgage notes and receiving a percentage of the returns. 

A REIT is a real- estate investment trust. This investment is not exactly a mortgage note but does invest in real estate. These investments include mortgage-backed real estate as well as income-producing real estate and you receive income on your investment. 

For the most part, an individual investor looking to purchase mortgage notes is going to do so through the secondary market. Consider these things when perusing your options. 

  • Payment History
  • Discount
  • Reliability
  • Income aspect

Consider using a mortgage broker or an investment advisor to help you find the best options. Again, experienced investors could potentially find and purchase their own mortgage notes. 

Buying Distressed Mortgage Notes – Is it a Safe Investment?

Ultimately, if you are going to invest in mortgage notes, it might be helpful to have some basic real estate knowledge as well as familiarity with the values of real estate. 

You don’t have to be a seasoned real estate manager or broker but it can be in your best interest to do some research and expand your real estate knowledge base. 

You should know what you’re getting into. While mortgage notes can be a plausible source of passive income, it can also be a significant risk. 

Many mortgage note investors choose to purchase distressed mortgage notes. This gives investors the potential to get into the real estate market at a significant discount. 

Here’s how you can differentiate if you want to purchase performing or non-performing mortgage notes. 

Performing notes are meant to be a source of cash flow. They offer steady passive income as a return for your investment. The risk and the return are modest and the goal is to simply continue to receive routine income for the most part. 

Non-performing notes are meant for a solely different purpose. The primary reason investors purchase distressed mortgage notes is for the discount. These investments include far more risk but could potentially offer a much higher rate of return. 

Purchasing distressed mortgages could lead to additional opportunities in regards to the property, particularly since you purchase the mortgage note at a discount to the property value. 

Mortgage Note Alternatives

We touched on this slightly a bit earlier in our guide, but we wanted to bring it back to your attention. If you’re not quite sure how to approach purchasing mortgage notes or you simply want to invest in real estate without the property, there are plenty of options

You can invest in real estate without buying property or individual mortgage notes. Here are a few mortgage note alternative options to consider. 

  • Real Estate Investment Trusts (REITs)
  • Real estate mutual funds (a diversified pool of real estate investments)
  • Real Estate ETFs (exchange-traded funds that invest in real estate)
  • Real estate partnerships
  • Online investment platforms
  • Wholesaling real estate

Before you jump into any one of these, be sure to do your research. Some require far more involvement than others. REITs, ETFs, and mutual funds can all be found in the secondary market and there are literally hundreds, if not thousands, to choose from out there. 

This is another area in which it may be beneficial to work with an investment advisor to research and find your best options. 

Why Buy Mortgage Notes?

Whether you have any real interest in real estate or note, mortgage notes can be a valuable source of investment in a passive income option. You can choose just how deep you want to go and how much risk you want to assess and those choices can be portrayed in the investment you choose. 

Investing in mortgage notes gives you inside investment access to real estate without any of the hassle of true ownership of a piece of property. You don’t have to care for the property or maintain it, you don’t have to act as a landlord. You simply invest in a piece of real estate, or perhaps multiple pieces, and enjoy your roll in receiving income from your investment. 


Mortgage note investing is not for everyone. We recommend that you work with a professional or, at the very least, do plenty of research before you start investing. There are inherent risks to investing in mortgage notes, as there are with any type of investment. 

Take the time to understand your investment and how it works as well as understanding the risks involved. Remember that there is no guarantee on your investment. Investing in mortgage notes can be quite rewarding if you take the time to understand just what you’re investing in. 

Happy investing to you!