Why invest in real estate secured notes?
5 minute read
September 27, 2021


Successful real estate investments aren’t just limited to purchasing actual properties. Those who prefer a more hands-off approach — or who just want multiple streams of income — should consider investing in real estate secured notes.

This investment alternative offers numerous benefits, including secure, passive income, but it also requires a bit of skill and preparation for the ultimate rewards. Part of this preparation includes choosing a trustworthy seller.

Learn what real estate secured notes are, how they work, and why you should consider investing in this type of asset.

What is a real estate secured note?

When a buyer or investor purchases a property and is not paying cash, they get a mortgage loan from a bank or funding group. As part of this transaction, the borrower signs a promissory note and a mortgage.

A promissory note is a written promise to repay a debt. It includes:

  • Amount of loan
  • Interest rate
  • Repayment timeline
  • What happens in case of default
  • Date and location
  • Signatures

A mortgage agreement, then, secures the loan with the real estate the borrower is purchasing. It defines this property and explains the responsibilities of the borrower and the lender.

There are a few types of promissory notes, including secured and unsecured. Secure notes have property tied to them, while unsecured notes have no collateral.

So how do these secured notes get into the hands of interested investors? They can purchase them from banks or funding groups.

How do real estate secured notes work?

Selling notes is a regular part of the mortgage business. Banks or other lenders sell loans into the secondary market to regulate their cash flow. 

The investors who purchase these notes then take over the role of the lender, collecting the borrower’s principal and interest rate payments until the note is fulfilled. 

Investors aren’t purchasing the property itself, but are essentially purchasing the remaining debt that’s secured by the property. Depending on the note type, investors may be able to purchase notes at a discount. 

Types of mortgage notes

In addition to secured and unsecured mortgage notes, there are also performing and nonperforming notes. These define the risk of the note. 

A performing note means the borrower is making current payments, while a non performing note means they have fallen behind on their payments.

Mortgage notes have different asset classes, categorized as commercial, residential, or even construction. 

Residential includes:

  • Single-family homes
  • Multi-family homes

Commercial includes:

  • Warehouses
  • Malls
  • Office buildings

Investors just beginning to dive into note investments, and those looking for predictable income, will find success with secured, performing notes.

What are the benefits?

Unlike investing in actual property, you will receive fixed payments each month when you purchase real estate notes. You don’t have to worry about the unpredictability of collecting rent, fluctuating market influences, or even repairs.

You also have the security of your investment being backed by real estate. When it’s done right, investing in real estate notes is even less risky than investing in real estate. Part of this risk involves choosing a seller you can trust.

Considerations for secured note investments

To find the greatest success with your secured note investments, you’ll need to understand the borrower’s current financial situation, as well as the loan terms and timeline.

A trustworthy seller ensures investors are protected, because they, in turn, have performed several steps to understand the trustworthiness of their borrowers. You can confidently purchase notes from these types of sellers.

It’s helpful to have a relationship with the funding group you’re purchasing the secured notes from, so you can feel secure in your investment. Hard money lenders are interested in the types of long-term relationships required for years of successful investments.

Why you should invest in notes from a hard money lender

The process to invest in secured notes varies depending on the seller’s method. Hard money, or private money, lenders are individuals or funding groups rather than banks. Hard money lenders don’t follow traditional lending guidelines.

Instead, hard money lenders focus on the merits of the deal, and decide to lend based on common sense. They trust their team’s experience to understand what makes a good deal.

While this offers flexibility to borrowers, it also offers greater opportunity to those looking to invest in secured notes. Hard money lenders are interested in building real relationships with borrowers and investors, because this benefits both parties long-term.

Protection from a lender you can trust

Marquee Funding Group offers investors secured real estate investments on all types of property throughout California and Colorado. Loans are scrutinized for the quality of the collateral as well as the borrower’s financials and ability to repay.

Marquee’s licensed professionals ensure investors are protected, in multiple ways. We provide:

  • Documented, escrowed, and evidenced investments by recorded security instrument
  • In-house origination and servicing
  • Net yields from 8-12% annually
  • Consumer and commercial loans

If you’re interested in investing in a real estate secured note, call us today to discuss our process and next steps.

Photo by Bench Accounting on Unsplash

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