Real estate

What is a Real Estate Note - Ultimate Guide?

Written By Urban Real Estate Center
Last Updated: Jan 10, 2023 •

Real estate notes, or mortgage notes, are an important financial instrument used to finance the purchase of property or land. They represent a legally binding agreement between a borrower and lender in which the borrower agrees to make regular payments on the loan over a specified period.

In exchange for these payments, the lender agrees to transfer ownership of the property or land to the borrower once all repayment obligations are met. Note investing is a popular way for investors to generate real estate returns without owning the asset.

By purchasing and holding promissory notes secured by mortgages on real estate properties and other assets, investors can benefit from higher yields with less risk than traditional stock investments.

This guide provides all the information you need to become an informed note investor, including understanding real estate notes, how they work, and where to find them. It covers common questions about note investing and provides tips for successful investing.

In this ultimate guide, we'll cover everything from what a real estate note is and why it matters to strategies for buying or selling them and looking out for potential pitfalls to avoid along the way. Don't worry if you don't have any experience dealing with these personalized financial contracts; the process can be manageable. With our comprehensive overview, you'll soon be navigating notes like a pro.


What Are Real Estate Notes?

Real estate notes are a form of financing that allows investors to purchase properties without using traditional bank loans. In essence, a real estate note is an agreement between a buyer and a seller wherein the buyer agrees to pay the seller for the property in monthly installments over some time.

The deed of trust associated with the real estate note secures the buyer's promise to make these payments and provides the seller with legal recourse should the buyer default on their obligations. Real estate notes can provide an attractive investment opportunity for those looking to diversify their portfolio due to their high returns and minimal risk.

Depending on factors such as current market conditions, borrower's creditworthiness, and loan terms, real estate note investments can offer yields ranging from 8%-15% annually. Moreover, while there is always some risk involved in any investment, investors can significantly reduce their risk by investing in performing notes rather than foreclosure ones. 

Real estate note investing also offers flexibility compared to traditional investments like stocks or bonds since it gives investors more control over when they wish to sell. Additionally, since they are not subject to public securities regulations like stocks are, investors have more freedom over how they structure their deals and don't have to worry about disclosure requirements or potential liabilities arising from non-compliance with applicable laws and regulations. 

Real estate notes provide an attractive opportunity for investors looking for higher investment returns without taking too much additional risk. With proper research and due diligence, investors can find high-yielding notes that offer a steady recovery and long-term capital appreciation potential.


What Is Real Estate Note Investing?

Real Estate Note Investing is an investment strategy that involves buying, holding, and potentially selling promissory notes secured by real estate. A promissory message is a legal document in which an individual or entity promises to repay a loan with interest over a certain period. When investing in real estate notes, the investor usually provides financing to an individual or entity in exchange for passive income from the loan repayment and a lien on the underlying collateral. 

When investing in real estate notes, investors typically purchase discounted notes from sellers such as banks or private individuals looking to cash out quickly. The note's current market value is typically lower than its face value, enabling the investor to earn money from the difference between what was paid and what's owed.

This discount may be due to changes in the local housing market or due to changes in the note's interest rate. Investors can also negotiate higher interest rates than those offered by banks, thus providing them with additional income streams through the repayment of principal plus interest payments. 

Real estate notes investing can be an attractive option for investors looking for a passive income stream due to its low required investment capital and high potential returns. Investors can choose to hold notes for long periods as long-term investments or flip them quickly for short-term gains.

Additionally, since liens on properties secure most promissory notes, there is less risk associated with defaulted payments than traditional loans backed only by borrowers' promises. As long as investors take reasonable precautions when selecting their note investments – including carefully researching markets, borrowers, and collateral, they can enjoy consistent returns from their assets while minimizing their risk exposure.


Where Can You Buy Real Estate Notes?

Several options are available if you're looking to buy real estate notes. Depending on your needs and budget, you can purchase a one-time message or an ongoing mortgage loan with monthly payments. You may also choose to buy foreclosed properties or take out a loan from a net holder. 

To begin your search, it's important to understand the process and terminology associated with buying real estate notes. Knowing the different types of messages available, the various costs associated with them, and the basics of how they work will help you make an informed decision about which option is best for you. 

One way to learn more about buying real estate notes is by reading online guidebooks or attending seminars run by experienced investors. These resources will provide valuable insight into the different types of messages on offer and important information, such as foreclosure laws in your area. Look for reliable sources when researching online; while many helpful guides are available online, some advice may need to be updated or corrected. 

It's also important to do thorough due diligence before investing in any real estate note. Researching current market conditions, researching similar properties in your local area, and consulting with a qualified real estate investor can all help ensure that you make a sound investment. You should also consider seeking professional advice from attorneys and tax advisors if needed. 

Finally, suppose you're looking for someone to help manage your buying process. In that case, there are numerous companies specializing in this line of service available throughout the country that can assist in finding quality deals that meet all of your criteria.

Whether you decide to purchase directly from an individual or company or enlist the services of an experienced third-party broker, they can help guide you through every step of the process and ensure that everything runs smoothly.


How Does a Real Estate Note Work?

A real estate note is an important part of the real estate transaction that often goes overlooked. It serves as an agreement between the borrower and lender, outlining the terms of repayment on the loan taken out to purchase the property. This document is typically signed at closing and gives all parties involved a clear understanding of what will happen in the event of default.

The buyer and lender benefit from this document because it outlines each party's obligations regarding repayment. For instance, if the borrower defaults on their loan, the lender could repossess or sell the property to recoup their losses. On the other hand, if borrowers have difficulty making payments due to financial hardship, they may be able to negotiate alternative payment arrangements with lenders in some cases.

One popular use for real estate notes is in "short sales," where properties are sold for less than what is owed. In these cases, lenders may accept discounted payments from buyers in exchange for releasing the mortgage lien on their property. Short sales can help borrowers avoid foreclosure while allowing buyers access to attractive real estate investments at discounted prices.

Non-performing notes are another type of real estate note where borrowers have stopped making payments altogether or have been delinquent for an extended period of time. Investors can purchase these non-performing notes as part of their overall portfolio strategy and then work with borrowers directly to develop repayment plans that make sense for both parties. 

Real estate notes provide important protection to buyers and sellers throughout any real estate transaction process, so anyone interested in buying or selling property must understand how they work before entering into any agreements.

A good guide to investing in real estate notes will explain all aspects of how they work, from lenders taking possession of the property in case of default to short sale negotiations to ensure that everyone involved knows their rights and responsibilities under such agreements.


Different Types of Real Estate Notes

Real estate notes are an important asset class for investors and lenders alike. The right-note investment strategy can generate significant returns while hedging risks. But before investing in real estate notes, it is essential to understand the different types of notes available and the associated terms. 

The two main categories of real estate notes are notes by asset class and notes by lien position. Noteholders can choose to invest in residential or commercial assets with unique risks and rewards.

Residential assets typically offer lower yields but tend to be less volatile than commercial investments. Commercial investments provide higher products but are more volatile and require more capital upfront. 

Notes by lien position refer to a lender's legal claim on a particular asset. The most common lien positions include first-lien mortgages, second-lien mortgages, mezzanine loans, land contracts, ground leases, deed of trust notes, and junior liens. Each of these lien positions has its own set of terms that must be understood before investing in a particular note type. 

To understand different types of real estate notes by asset class and lien position, investors must also consider performance when making an investment decision. Performance is measured on a variety of factors such as occupancy rate, annualized return on investment (ROI), loan-to-value ratio (LTV), and debt service coverage ratio (DSCR). These metrics help investors gauge the likelihood of repayment on their investment and potential rewards if their chosen note performs better than expected. 

Investing in mortgage notes can be a lucrative way for investors to diversify their portfolios while mitigating risk due to the diverse pool of underlying assets available within this asset class. Before making any investment decision relating to real estate notes, prospective note holders need to consider all aspects associated with obtaining a real estate note, including the legal requirements, market conditions, and financial considerations.



A real estate note is a loan secured by the property. It's an agreement between the borrower and lender that spells out the terms of the loan, including how and when it will be repaid. Real estate notes are often used to finance the purchase of investment properties, such as rental homes or vacant land. A real estate note may be a good option if you're considering borrowing money to buy property.

Urban Real Estate Center

Are you wondering what a "real estate note" is or why you should invest in one? Read on for everything you need to know about this fascinating investment opportunity!