Note investing suits you if you have money you can leave tied up for years, the patience to read documents, and a plan for the day a borrower stops paying. It is a poor fit for money you may need back on short notice, or for anyone who wants an investment that needs no attention.
What you are signing up for
When you buy a note, you step into the lender’s position on someone else’s loan. The borrower pays you each month, and your security is a lien on the property, a legal claim that lets you recover what you are owed if the borrower defaults.
What you own is a contract. There are no tenants and no repairs, and equally no way to raise the payment and no simple way to sell in a hurry. If the mechanics are new to you, start with how note investing works, then use the rest of the investor guide for what a new buyer has to learn after that.
Questions to put to yourself
Can you leave the money alone?
A note pays you back slowly, over the life of the loan. To get your capital out early you have to find a buyer, and that buyer will set the price, so money you may need within a few years belongs somewhere easier to exit.
Can you afford for one note to go wrong?
Borrowers lose jobs, get divorced and fall ill. That is the first of the risks of note investing, and if a single default would damage your finances, the note is too large a share of what you have. You also need cash in reserve beyond the purchase price, because a default brings legal fees and sometimes property taxes before it brings any recovery.
Will you do the reading?
The work comes at the front. Before you fund, someone has to check the note, the recorded lien, the title, the property value and the payment history. You can hire help for each piece, but you have to understand what you are being told, and a person who is bored by documents will not enjoy any of it. You can find out which you are before spending anything: buyers who join the buyer list receive note summaries that match the criteria they set, and nothing requires a bid on any of them. Try to price a few and notice whether the work holds your interest.
Do you want certainty or control?
A note gives you a fixed schedule of payments and very little control, since you cannot improve the property or change the terms on your own. If you like to add value with your own effort, owning real estate may suit you better, and our comparison of notes and rental property sets the two side by side.
Could you be the lender in a default?
A default can end in a payment plan agreed over the phone. It can also end in foreclosure, which means taking a property from a person or a family. A servicer and an attorney can carry out the steps for you, but the decision to start remains yours.
Who it tends to suit
| It tends to suit you if | It tends not to suit you if |
|---|---|
| You have capital you will not need for years | You may need the money back soon |
| You want scheduled payments more than growth in value | You are counting on the asset rising in price |
| You are willing to learn the paperwork or pay for review | You want to buy on a summary and a phone call |
| You hold other investments as well | This would be the bulk of your savings |
| You can stay calm through a slow legal process | A missed payment would keep you awake |
The question this page cannot answer
Nobody can tell you what you will earn. The return on a note depends on the price you pay, whether the borrower keeps paying, and what it costs you to hold and service the loan, so be wary of anyone who quotes you a return before you have seen a file. We make no return claims and we are not investment advisers. Whether notes belong in your finances is for a financial adviser who knows your whole situation.
Take that adviser your answers to the questions above, along with the size of the note you have in mind set against the size of everything else you hold.
Related questions
Do I need real estate experience to buy notes?
It helps, because you need to judge the property behind the note, but it is not required. You do need to understand the documents and the process, or pay people who do and be able to follow their findings.
Can I try note investing with a small amount first?
Smaller notes and partials need less capital, though the costs of checking a deal do not shrink in proportion. Reviewing real note summaries without bidding is a way to learn before any money is at risk.