What Makes Mortgage Notes Such a Great Investment?

Tara Mastroeni
Published: April 29, 2015 | Updated: December 11, 2021

Many investors are saying that the time is right to invest heavily in mortgage notes, i.e. to buy up mortgage debt. What makes it such a good investment? Here are five huge advantages:

1.  Prices are lower than ever – Mortgage notes (and/or debt instruments) have been available as an investment vehicle for ages (dating back to the Roman Empire). However, they have perhaps never been priced so low or available in such large numbers as right now. When the recession hit in 2007-2009, many homeowners found themselves underwater in terms of their mortgage. At the same time they faced layoffs, lost investments and other financial hardships. The result is that there are a lot of under-performing mortgages out there, and banks are selling them off in record numbers at record low prices. If you know the adage “buy low, sell high” then you understand why that makes it a good time to purchase mortgage notes.

2.  You can choose specific notes – You don’t have to grab notes at random or take whatever the bank happens to offer. Notes are being sold in small lots or even individually. That means you can choose a city and neighborhood and select the note you wish to buy, based either on its specific history or on the property—or both. You can do your homework, and it pays off.

3.  You can work out a win-win with the homeowner – Once you buy a mortgage note you are essentially the bank. That means you can offer to modify the mortgage if you see fit. This can be a great strategy, because you bought the mortgage at a discount, and can afford to cut down the monthly payments—which means the homeowner could then afford to get back on track paying them. It can result in a win-win where they keep their house and you make a goof profit.

4.  You can rehabilitate the mortgage note – If you buy a note with a delinquent homeowner, but manage to get them back to making payments on time, the mortgage is no longer considered to be under-performing. If they get on track for 12 months or longer you have essentially rehabilitated it and can turn around and sell the note for more than you bought it for.

5.  If they default, you can foreclose on the property – One of the best things about mortgage notes is that they offer a safety net. If the homeowner continues to fail to make payments, you can foreclose. You then own the property and can either rent it or sell it.

Are you considering investing in mortgage notes? What has gotten you interested?