A private note, a bond, a CD and a REIT all pay you income, but they differ in what stands behind the payments, how easily you can get your money out and how much of the work falls on you. A note is the least liquid and most hands-on of the four, secured by one property and one borrower, and priced by negotiation rather than by a market screen.
Each comparison below is about structure, not about which one pays more. Returns on all four move with interest rates, credit risk and the price you pay, and none of them is promised. Any figures on this page are illustrative.
The four side by side
| Private note | Bond | Bank CD | REIT | |
|---|---|---|---|---|
| What you own | A loan to one borrower, usually secured by real estate | A loan to a government or company | A deposit at a bank | Shares in a company that owns property or mortgages |
| What protects you | The borrower’s payments and the lien on the property | The issuer’s ability to pay, sometimes a rating | FDIC insurance up to the current limit | The company’s portfolio and management |
| How principal comes back | Usually a little each month | Usually all at maturity | At the end of the term | Only by selling the shares |
| Getting out early | Sell the note, at a negotiated price | Sell on the bond market at the day’s price | Early withdrawal penalty | Sell listed shares any trading day; non-traded REITs may restrict it |
| Who does the work | You, with a servicer and an attorney | The issuer and your broker | The bank | The REIT’s managers |
| Price you can see | None until you ask buyers | Quoted daily | Fixed | Quoted daily if listed |
Notes and bonds
A bond and a note are both debts, which is why the comparison comes up so often. The differences are in who the borrower is and how the money comes back.
A typical bond pays interest twice a year and returns the whole principal on one date at the end. A typical real estate note amortizes, meaning each monthly payment covers that month’s interest plus a slice of principal, so the balance shrinks to zero over the term. You get your capital back gradually, and you have to find somewhere to put each month’s principal.
Take an illustrative $50,000. A bond bought at face value for $50,000 pays its coupon each half-year and $50,000 at maturity. A $50,000 note balance paying $600 a month returns part of that $50,000 in every payment, so part of your money is back in your account long before the last payment. The note’s borrower can also pay off early, often without penalty on a private note, which returns all of your capital at once whether or not you are ready for it.
Credit risk works differently too. A bond’s issuer is usually a large entity whose finances are public, and a bond fund spreads that risk over hundreds of issuers. A note rides on one household or one business, and its main protection is the property: if the borrower stops, you may foreclose. That protection is real, but it costs time and legal fees to use, which is why the risks of note investing center on default.
Both lose value on paper when market rates rise. With a bond you see it on your statement. With a note you only find out when you try to sell, because a buyer prices the remaining payments at the return they need today.
Notes and CDs
A CD is about as simple as income gets. You deposit money for a set term at a stated rate, the bank pays the interest, and deposit insurance covers you up to the FDIC limit if the bank fails. There is no borrower to check, no property, no paperwork beyond the account opening.
A note offers nothing like that insurance. Whatever extra a note may pay over a CD is payment for taking on credit risk, illiquidity and work, and it is only worth having if you are equipped for all three. If the money is your emergency fund, or you will need it on a fixed date, a CD fits that job and a note does not.
Notes and REITs
A real estate investment trust is a company that owns income property, real estate loans or both, and passes most of its taxable income to shareholders. Mortgage REITs are the closer comparison, because they hold loans rather than buildings. Making short real estate loans of your own is another option, set against note buying in notes vs hard money lending.
Owning REIT shares gives you a slice of a large, managed pool. You pick nothing and check nothing, and a listed REIT can be sold any trading day. In exchange, the share price moves with the stock market, sometimes sharply, and you have no say over which loans are held or how defaults are handled. Many mortgage REITs also use a good deal of borrowing, which magnifies gains and losses.
Owning a note directly is the opposite trade. You choose the borrower and the property, read the file and decide what happens in a default. There is no daily price to unsettle you, and no daily buyer either. A note fund sits between the two: pooled like a REIT, usually far less liquid, and run by a manager whose terms you take as written.
Tax, in outline
Interest on a private note is generally taxed as ordinary income, and the gain on a note bought at a discount is taxed as the discount is collected. How income from notes is taxed sets this out at more length. Interest on US Treasury bonds is generally free of state income tax, and many municipal bond interest payments are free of federal income tax. CD interest is taxed as ordinary income. REIT dividends are taxed under their own rules, and much of what a REIT pays out is not eligible for the lower rate on qualified dividends. Holding any of them in an IRA changes the picture again, so check your own case with a CPA. A note bought below its balance also brings in the market discount and OID rules.
Which fits which money
- Money you may need soon, or must not lose: a CD or a short Treasury fits that need, and a note does not.
- Money you want spread across many borrowers with no work: a bond fund or a REIT, with the market swings that come with them.
- Money you can leave alone for years and are willing to manage: a note can fit, if you can read a file, keep a cash reserve and live without a daily price.
Many investors hold more than one. Notes are often a small slice of a larger mix rather than a replacement for it, and the work involved is the first thing to weigh, since note investing is less passive than it is often sold as.
Seeing what a note actually offers
Comparisons only go so far. The way to judge a note against your bonds or CDs is to look at a real file: the payment, the term, the property, the payer’s record and the price, and then work out the return at that price yourself. If you would like to see notes laid out that way, join the buyer list and you will be sent individual notes we broker as they come up, with the figures behind each price, to accept or pass on as you see fit.
Related questions
Is a private note safer than a bond?
Neither is safer by default. A bond's risk is the issuer's ability to pay; a note's risk is one borrower, with a lien on property as protection. The answer depends on the specific bond, the specific note and the price you pay.
Can I sell a note as easily as a bond or REIT share?
No. Listed bonds and REIT shares can be sold on a market at a quoted price. A note is sold by finding a buyer and negotiating, which takes weeks and usually means a discount.
Do notes pay more than CDs?
They may, but nothing is promised. Any extra return over a CD is payment for credit risk, illiquidity and the work of owning a loan, and a default can wipe it out.