What Is Mortgage Note Investing? A Complete Beginner's Guide

If you've ever thought about investing in real estate, chances are you pictured buying a rental property. Finding tenants. Collecting rent. Fixing things that break at inconvenient times.

That model works. But it's not the only way to profit from real estate. And for a growing number of investors, it's not even the best way.

There's a strategy that banks and institutional investors have used for generations — one that lets you earn passive income from real estate without ever owning a property, managing a tenant, or unclogging a drain. It's called mortgage note investing, and this guide will show you exactly how it works.

What Is a Mortgage Note?

When someone buys a house with financing, they sign two key documents. The first is the mortgage (or deed of trust), which uses the property as collateral. The second is the promissory note — a legal document where the borrower promises to repay the loan under specific terms: the amount, the interest rate, the monthly payment, and the timeline.

That promissory note is a financial asset. It represents a stream of future payments backed by real property. And just like stocks, bonds, or any other asset — it can be bought and sold.

When someone says they're investing in "mortgage notes," they mean they're purchasing these promissory notes from banks, credit unions, hedge funds, or other investors. Once you own the note, the borrower's monthly payment comes to you.

How Does Note Investing Work in Practice?

The mechanics are simpler than most people expect. Here's the basic process:

You find a mortgage note for sale. These are available through note brokers, online marketplaces, bank portfolio sales, and networking with other investors.

You perform due diligence. This means reviewing the borrower's payment history, the property value, the loan terms, the title, and the legal standing of the note. This step is critical and it's where education makes the difference between a smart investment and an expensive mistake.

You purchase the note. The seller assigns the note to you, and a loan servicer is typically set up to handle payment collection, borrower communication, and record keeping.

You collect payments. The borrower continues making their monthly mortgage payment, but now it comes to you (through the servicer) instead of the previous note holder.

That's it. You don't own the property. You don't deal with maintenance, property taxes, insurance, or tenants. You own the debt obligation, secured by real estate, and you collect the income.

Performing vs. Non-Performing Notes

Not all mortgage notes are the same. They generally fall into two categories, and understanding the difference is important before you invest.

Performing notes are loans where the borrower is current on payments. They're making their monthly payment on time, and the note generates consistent, predictable income. Think of these as the "steady paycheck" of note investing. You buy the note, payments come in, and your job is mostly to monitor the investment.

Non-performing notes are loans where the borrower has stopped paying. These sell at a much steeper discount because they require work to resolve. As the note holder, you have several options: work with the borrower to restart payments through a loan modification, negotiate a discounted payoff, arrange a short sale, or pursue foreclosure and recover your investment through the property.

Non-performing notes offer potentially higher returns, but they come with more complexity and risk. Most beginners start with performing notes to learn the fundamentals, then explore non-performing deals as they gain experience.

Why Are Investors Choosing Notes Over Traditional Real Estate?

The appeal of note investing comes down to a few key advantages that traditional property ownership doesn't offer.

There's no property management. You don't own the house, so you're not responsible for maintenance, repairs, property taxes, or insurance. The borrower handles all of that because they own the property.

There are no tenants. No screening, no leases, no evictions, no late-night emergency calls. The borrower has a contractual obligation to pay, and the property serves as collateral.

You can invest from anywhere. Since you're not managing physical property, geography doesn't limit you. Many note investors manage their entire portfolio from a laptop, holding notes on properties across multiple states.

The investment is secured. Every mortgage note is backed by real property. If a borrower defaults, you have legal remedies — including the ability to foreclose — because you hold the lien on the property.

Notes can be purchased at a discount. In many cases, you can buy a note for less than the outstanding loan balance. This creates built-in equity from day one and provides a margin of safety.

What Kind of Returns Can You Expect?

Returns vary depending on the type of note, the purchase price, and the borrower's payment behavior. But to give you a general picture:

Performing notes typically yield anywhere from 8% to 15% annually, depending on the interest rate, the discount at which you purchased the note, and the remaining term.

Non-performing notes can generate higher returns — sometimes 15% to 30% or more — but they require more expertise, more work, and carry more risk.

For context, the long-term average annual return of the S&P 500 is around 10%. A well-selected performing note can match or exceed that with monthly cash flow instead of waiting for stock appreciation.

What Do You Need to Get Started?

Three things: education, capital, and a system.

Education comes first and it's the most important. Understanding how to evaluate notes, assess risk, and navigate the legal process is essential before you invest a dollar. The investors who succeed are the ones who invest in learning before they invest in notes.

Capital requirements vary. Some performing notes can be purchased for as little as $10,000 to $20,000. Non-performing notes at deep discounts can sometimes be acquired for even less. And if you have a self-directed IRA or 401(k), you may be able to invest using retirement funds — with significant tax advantages.

A system means having reliable sources to find notes, a process for due diligence, a loan servicer to handle payments, and a network of professionals (attorneys, title companies) to support your transactions.

Your Next Step

If mortgage note investing sounds like something worth exploring, here's the best way to go deeper:

I've put together a free ebook that expands on everything in this article — with more detail on how notes work, what to look for in a deal, and how investors are building portfolios. Get Access Here →

And if you want to see note investing in action with real deal breakdowns and live Q&A, there's a free 90-minute masterclass called "Be the Bank" that runs every other Wednesday. It's the single best introduction to note investing available, and it costs nothing to attend. Register here →

Note investing isn't complicated, but it does reward people who take the time to learn before they leap. That first step — whether it's the guide or the class — is where every successful note investor started.

— Tom Force Founder, Note Club USA NoteExpo Investor of the Year 2022 & 2024