What Is a Note in Real Estate? You Can Buy Them Here!

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Written By Justin McGill

DealBloom aims to share the latest tips and strategies to help realtors, brokers, loan officers, and investors navigate the world of real estate.

If you’re looking to invest in real estate but don’t know where to start, this post is for you! I was once in your shoes, not knowing anything about notes or how to purchase them. But after doing my research, I found that investing in real estate notes can be a great way to make money. So what is a note in real estate?

A note is simply a loan that is secured by a property. When someone buys a property using financing, the buyer usually signs two documents: a promissory note and a mortgage (or deed of trust). The promissory note outlines the terms of the loan, including the interest rate and repayment schedule.

The mortgage (or deed of trust) secures the loan by putting up the property as collateral. If the borrower defaults on the loan, then the lender can foreclose on the property and sell it to recoup their losses.

Learn more about what is a note in real estate so you can start investing even without a lot of capital.

What Is a Note in Real Estate?

If someone does not have the money to buy a property outright, they will be asked to sign a note and a mortgage. They’ll put down a deposit and then sign a contract that commits them to pay back the rest.

A note is essentially just a written contract where the borrower agrees to pay their lender.

Investing in real estate notes is when you purchase the promissory note and mortgage from a borrower. This can be a lucrative investment, as you will be receiving monthly payments from that borrower until the balance is paid in full. If the buyer fails to make their payment, you can foreclose on the home.

As the lender, you will be collecting payments from the borrower once you invest in a mortgage note. This gives you an opportunity to earn money from your investment while also helping out the borrower.

Those who invest in mortgage notes and deeds typically do so by buying these at a reduced rate.

This type of investment can be very profitable for the investor because they are essentially being paid interest on the money that they have loaned out.

Now, we will look at the benefits and drawbacks of investing in notes.

Are you interested in investing in property, but don’t want to deal with the hassles of owning, renting, or maintaining it?

This type of real estate investing is called note investing.

Note investing is a type of real estate investing that allows you to earn passive income, focus on the business side of things, and not have to worry about maintaining a property.

This article will break down the specifics of real estate investing notes so that you can determine if it’s right for you.

Real Estate Note vs Lien: What’s the Difference?

A real estate note is a legal document between a borrower and a lender that details the terms of the property loan. The lender agrees to provide a loan to the borrower, and in return, the borrower promises to repay it based on the terms written on this note.

The property serves as collateral for the loan, meaning the bank holds a lien on the home until the debt is paid off.

A lien gives a lender the legal right to seize your property if you fail to repay your loan as agreed upon in the note.

Types of Real Estate Notes

There are both residential and commercial mortgage notes and both use the property as collateral.

All mortgage notes should clearly state the responsibilities and obligations of all parties involved. A major difference between mortgage notes is the loan term.

A fixed-rate mortgage or FRM is a loan that charges a fixed interest so the payments are a set amount. This is the most popular kind of home financing that banks are able to offer, but private lenders can also offer it.

One of the great benefits of this loan is that the borrower has the same payment amount each month. This can help with budgeting and make it easier to plan for expenses.

A graduated payment mortgage or GPM is a great option for borrowers who want a fixed interest rate and low initial monthly payments that gradually increase over time.

These loans are often taken out for students, but they can also be found in real estate. This is a kind of negative amortization loan as there is a risk that the borrower might not be able to make the higher payments later.

An adjustable-rate mortgage or ARM has an interest rate tied to a third-party index.

Because the interest rate of adjustable-rate mortgages (ARMs) is tied to the Federal Reserve, ARM interest rates will rise and fall along with federal rates.

For consumers, this may mean lower mortgage payments when interest rates are low.

However, when interest rates rise, it may become difficult for borrowers to afford their monthly house payments. Lenders, on the other hand, are protected from losses in such a scenario.

Because private loans can be paid off early, borrowers have the option to pay the same amount each month, but the amount applied to the principal of the mortgage with each payment is made differently.

A balloon payment mortgage is a home loan where the borrower makes one final large payment for the loan. This is opposed to a traditional mortgage loan, where the entire debt is paid off at the end.

A borrower may accept a balloon payment for a loan if they can’t manage to make the monthly payment.

The balloon payment at the end of a private mortgage can be a risky proposition for the borrower. If they are unable to make the payment, they could lose their home.

One way to mitigate this risk is by hoping to qualify for a conventional home loan at the end of the mortgage term. This would provide the funds necessary to pay off the balloon payment and avoid foreclosure.

This is separate from a mortgage acceleration clause, which can make your entire loan balance immediately payable after payment is made late.

An interest-only loan is a type of mortgage loan where the borrower only makes interest payments. Some borrowers choose this type of home loan because they cannot afford to make payments on the full principal.

This particular demographic of borrowers is very high risk; however, interest-only loans are attractive to them because the monthly payments are lower than if they were paying on the principal.

This is a common type of mortgage for property developers.

Interest-only loans were popular in the lead-up to the Great Recession as they allowed for greater speculation in hot real estate markets. However, since people stopped making progress on the loan balance, these types of loans have all but disappeared from the residential market.

This left many people in difficult situations, owing more money on their homes than what the property was worth.

If you find yourself in a situation where your home is worth less than what you owe on your mortgage, don’t despair. You may be able to refinance into a fixed-rate mortgage once the value of your home has gone up.

The interest-only mortgage was beneficial for them as it allowed them to purchase a home before prices went up.

These mortgages were often turned into negatively amortizing ones because homeowners who couldn’t afford them ended up missing payments and seeing the balances on their mortgages go up.

Interest-only loans can be high-risk unless you’re working with an experienced real estate developer. If minimum payments don’t cover the full interest payment, this can lead to accrued interest that compounds over time.

If you’re looking for a high-risk loan, an interest-only hard money loan might be the right fit. With this type of loan, you only have to pay the interest on the loan for a set period. After that, you can either refinance the loan or pay it off with a third-party mortgage.

How to Buy Real Estate Notes

There are a variety of ways to buy and invest in mortgage notes.

If you have an existing relationship with a bank, you may be able to speak to them about selling any of their real estate notes.

You can also find several websites that sell mortgage notes such as NotesDirect.

This real estate investing strategy is one of the simplest ways to invest in notes. You’re basically acting as a landlord where you receive monthly payments from the tenant.

If the loan is underperforming, investors can renegotiate the terms of the agreement with borrowers. This could include increasing the amount of each payment or shortening the amount of time it takes to repay the loan.

This investment method is great for earning passive cash flow with real estate investing.

Just like with real estate, investors buy defaulted loans at low prices.

Then, they rehab it.

The lender and borrower renegotiate the terms of the loan, often to terms that are more favorable for the homeowner.

If the borrower is making scheduled payments and the note is performing well, the investor can sell the note to another investor for a profit.

If you’re looking to buy a distressed property, one way to do so is to purchase a nonperforming note and become a primary mortgage holder. This puts you in control of the home and allows you to work with the homeowner to get them back on their feet.

If an investor wants to, they can try restructuring the loan with the homeowner so that it’s performing well again and then they can proceed with their other strategies such as selling or holding the notes.

But, it may be hard to negotiate now.

If the homeowner can’t renegotiate their loan and it stays in arrears, the investors are then able to begin the foreclosure process.

This can result in the investor becoming the owner of the property for 10% to 30% below its actual value.

This real estate investing strategy is time-consuming, and you’ll need to put in a lot of effort.


If you’re looking to invest in real estate but don’t know where to start, then learning about notes is a great place to begin. Notes are simply loans that are secured by property and can be bought from many different sources. By understanding what is a note in real estate and how they work, you’ll be one step closer to becoming a successful real estate investor!

Justin McGill