Investing in mortgage notes has become an increasingly popular alternative investment in recent years. As an investor, purchasing mortgage notes can provide steady cash flow and diversification to your portfolio. However, there are some key factors to consider when investing in mortgage notes. By understanding the basics of mortgage notes, evaluating risk and return, and researching diligently, investors can tap into the potential of this asset class.
Understand the basics of mortgage note investing
Mortgage note investing involves purchasing existing mortgage notes from banks and mortgage companies. As the note holder, the investor receives the monthly mortgage payments including interest and principal from the borrower. There are three common types of mortgage notes – performing, re-performing and non-performing. Performing notes have borrowers that are current on payments, while non-performing notes have borrowers in default. Re-performing fall in between. When the underlying mortgage is paid off, the note investor receives the remaining principal balance. By understanding the type of note, the risks and cash flow potential, investors can pick suitable investment vehicles.
Conduct due diligence on mortgage notes
Conducting thorough due diligence is critical when investing in mortgage notes. First, review the property’s valuation to ensure there is adequate equity supporting the note. Examine factors like the location, comparable sales, rental income potential and repairs needed. Also assess the borrower’s financial strength through employment history, income, debts and payment record. Validate all paperwork for validity. Additionally, inspect factors like seasonality, environmental hazards, title issues and lien position. Spending time upfront doing due diligence helps avoid potential pitfalls later.
Understand risks and returns of mortgage note investing
The risks and returns of mortgage note investing can vary substantially depending on the type of underlying note. Performing notes generally offer stable cash flow with lower returns. However, they involve lower risk as borrowers are making payments. Non-performing notes can potentially generate higher returns through strategies like foreclosure or loan modification. But they have higher risk if the borrower defaults. Investors must assess their risk tolerance and return objectives. Notes can be purchased individually or bundled in pools. Pooling helps diversify risk. But individual notes allow targeting of higher returns through specific strategies.
Leverage investment knowledge and online resources
There are numerous online resources for researching and evaluating mortgage note investments. Loan portals like LoanMLS allow searching for inventory based on criteria like location, balance and payment status. Real estate sites like Zillow provide property valuations. Resources like Mortgage Note Buyers Network offer education on evaluating and investing in notes. Joining local real estate investor groups can also provide access to deal flow. Leveraging the abundance of data, tools and knowledge online helps investors thoroughly research opportunities.
By understanding the mortgage note basics, conducting due diligence, evaluating risks and returns, and utilizing online resources, investors can capitalize on this alternative investment strategy. Mortgage note investing provides portfolio diversification along with stable cash flow potential. However, appropriate research and prudent evaluation is key to profitability.