Creating Passive Income Through Real Estate Notes

What Are Real Estate Notes?

A real estate note is a debt instrument secured by real property. When someone borrows money to buy real estate, they sign a note promising to repay. That note can be bought and sold by investors. When you buy a note, you become the lender. The borrower makes their mortgage payments to you.

Performing vs. Non-Performing Notes

Performing Notes

The borrower is making payments. You buy the payment stream at a discount. Example: buy an $85K note on a $100K balance and collect $665/month at a 9.4% effective yield. Low risk, 7-12% returns, minimal effort.

Non-Performing Notes

The borrower stopped paying. Banks sell these at 30-60% of face value. You buy the note and work it out — loan modification, deed-in-lieu, short sale, or foreclosure. Higher risk, 15-30% returns, requires active management.

Where to Buy Notes

Performing: note brokers, Paperstac marketplace, direct from seller-financed property owners. Non-performing: bank portfolio sales, FDIC sales, note trading platforms, other investors.

Due Diligence

Before buying any note, review the original promissory note terms, verify the mortgage is properly recorded, confirm lien position, assess the collateral property value, and review the borrower's payment history. Investment-to-Value below 65% is ideal.

Non-Performing Note Resolution

1. Loan modification — negotiate new terms to get borrower paying again (30-90 days)
2. Deed-in-lieu — borrower transfers property to you to cancel debt (30-60 days)
3. Short sale — borrower sells and you accept less than owed (60-120 days)
4. Foreclosure — legal process to take ownership (3-18 months, $3K-15K legal costs)

The Bottom Line

Note investing offers passive income without property management. Start with performing notes for predictable 7-12% yields. Graduate to non-performing for 15-30% returns once you understand the workout process. Diversify across 3-5 notes minimum.