Mortgage Note Investing

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Mortgage Note Investing

At Aspen, we are investors that are always looking for opportunities outside of the stock market with high returns and low volatility. Because of this, we often end up in the world of alternative investments.

While there are many ways to invest in alternatives, our favorite option is mortgage note investing. We saw (and continue to see) so much potential for wealth creation in this niche that we started an entire investment fund around it in 2013. If you’re one of the many investors interested in learning more about this fairly young area of alt investing and why it’s becoming so popular, read on.

What is Note Investing?

First off, it’s important to explain what mortgage note investing actually is. Note investing is simply the purchase of new or existing mortgages (or trust deeds), called notes. And for our purposes, we are only talking about the private purchasing of notes. These mortgage notes are backed by the actual real estate property, in much the same way your home is the collateral for the loan your mortgage lender gave you when you bought it. Whoever owns these notes essentially becomes the mortgage lender. This is different from buying a real estate property in that with note investing, an investor doesn’t own the property, but rather the secured debt.

Before we go further, I want to make a critical distinction. Many people who aren’t very familiar with note investing will probably be thinking of mortgage-backed securities, which was responsible for the demise of the housing market in 2008. That is a form of public note investing, and that is not what we’re talking about.

What Types of Notes Are There?

While all notes are similar in that there is an owner of the mortgage who receives payments from the borrower, there are a surprising number of ways that owning real estate notes can generate income:

  1. Hard Money Loans – Often short-term bridge loans, hard money loans are made
    to house rehabbers that need capital to purchase and flip a home. Hard money
    loans can be made on an individual level (for example, say you have $100,000
    and loan it to a rehabber to purchase a home, renovate it, and sell it), or an
    investor can invest through a hard money fund, which essentially pools
    investments and loans on a larger scale to many rehabbers.

    Hard money loans tend to be short-term, between 12-18 months, and often earn
    about 12-15% interest. While they have a high earning potential, they are cyclical

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