Real estate notes are a new type of real estate investment product created when parties reach a transaction agreement, giving one party the capital to buy a house or other property. The real estate note holder receives the loan borrower’s payments regardless of who originally financed the property. But are real estate notes worth the risks?
Real estate notes risks should be identified to find out if this investment is worth it. In this article, you’ll learn more about real estate notes, the risks involved, and the investment advantages.
What Are Real Estate Notes?
Real estate notes pertain to the loan documents, giving the lender assurance that the borrowed money will be repaid. Investors can buy and sell real estate notes on the open market if they want to cash in on the loan repayment.
Types Of Real Estate Notes
Investors can sell real estate notes from the loan agreements of different real estate financing instruments. Each real estate note document covers the terms of loan repayment of a property purchase. Aside from residential properties, real estate notes are also available for commercial and industrial properties, making notes worth the risks for a diverse real estate investment portfolio.
They are as following:
- Promissory Notes: A promissory note refers to a financial instrument containing a written promise by the real estate note’s issuer to pay the payee a sum of money at a specified future date or on-demand.
- Deeds Of Trust: It’s essentially an agreement between a borrower and a lender, giving the property to a trustee or neutral third party. The trustee holds the real estate property until the loan borrower pays off his debt. The borrower keeps the equitable or actual title to the property during the repayment period. Also, the borrower is responsible for the premises unless the Deed of Trust stated otherwise. The trustee holds the property’s legal title.
- Land Sale Contracts: Instead of borrowing money from a bank or a lender to buy a real estate property, a buyer makes payments to the seller or real estate owner until the total price is paid in full in a land sale contract.
- Contracts For Deeds: This legal agreement applies for the sale of a real estate property, wherein a buyer makes payments and takes possession while the seller holds the title until the purchase price is completed.
Risks Of Real Estate Notes
In real estate note investment, there’s a risk that the loan borrower will default. There’s a danger that the borrower stops paying. So, the note owner may end up suing the borrower or pursuing foreclosure. However, real estate notes can perform better than savings and certificates of deposit (CD).
Smart investor research on each real estate note, uncovering the following:
- The real estate property’s value
- The borrower’s payment history and credit rating
- The complete details of loan documents
- A backup plan in case of default payments
Top Reasons to Invest in Real Estate Notes
It’s so easy to turn away with the idea of investing in real estate notes because real estate properties are tangible assets. But if you come to realize the benefits of investing in notes, your first impression can change.
So, what are the reasons why you should consider investing in real estate notes? Here are the reasons why you should invest in real estate notes:
- Higher ROI: Real estate notes provide higher return rates than bank accounts and other investments, ranging from 7% to 9% for long-term loans and 12% to15% for short-term loans. Short-term loans are usually availed by investors flipping properties.
- Steady Passive Income: You purchase the whole mortgage amount in a real estate note, so you’ll continue to receive money (payment plus interest every month). If the property owner refinances or sells within five years, you’ll enjoy an early payoff.
- Guaranteed Investment: Real estate notes are backed by real property, so you can recoup your funds by pursuing a foreclosure or selling the property.
- Convenient Investment: Real estate notes are easier to manage as compared to rentals. You won’t need to face what landlords usually undergo, resolving all kinds of tenant issues, including eviction and tenant communication. Also, you don’t need to deal with maintenance and contractors. So, it’s worth investing in notes in which you own the loan instead of the property.
- Work With Investors: Real estate notes investment allows you to work with homeowners and investors, not renters. Buying notes means you’re accepting payments from a homeowner with an emotional stake and equity in the property. This connection makes real notes a safer option than rental properties.
When making a significant real estate investment, it’s crucial to obtain multiple quotes for real estate notes before entering a transaction. Consider a red flag if the real estate note transaction involves upfront fees, or a borrower refuses to run a credit check. Ensure a written agreement for the sale transaction, stating the processing time on repayments before you agree to a sale.
Buying and Selling Real Estate Notes
You can invest in performing real estate notes, in which the borrower makes consistent loan payments, giving you a steady passive income stream. If you’re knowledgeable about the collections process and know effective exit options, non-performing real estate notes can give higher profits than performing notes.
If you want to sell your real estate notes, you can promote this investment product in various investment listings with a brokerage firm or a capital financing firm. You relinquish to the buyer of the notes the rights to collect payment based on the loan agreement.
Real estate investing is promising. Instead of managing a property, you can invest in real estate notes and receive repayments as the note holder. While there’s a risk of the borrowers defaulting on their payments, you can avoid this from happening by conducting thorough checking.
With real estate notes, you can expect higher returns than bank account savings and CD. Get the chance to own a real estate investment without worrying about landlord responsibilities. Hence, to conclude, real estate notes are worth the risks.
Danis Woods in Businessman, investment banker and stock exchange traders. On the same time he loves writing financial blogs to shed lights on different aspects that new and existing businessman are not aware of.