What is the Difference in Real Estate Investing and Note Investing?

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Mortgage and Lending with Level 4 Funding NMLS 1018071 AZMB 0923961

What is the Difference between Real Estate Investing and Note Investing?

When investing in notes, you are buying the debt secured by a piece of property, the promise of repayment, and (generally) the right to foreclose and recoup your investment if the borrower fails to meet obligations or make payments. You just do not own the physical real estate.

Real estate investors gain full access to a property when they purchase it. A note owner does not have the rights to use or enter the property unless outlined in the loan agreement.

When you own a real estate note, the payments you receive are fixed according to the note. Vacancies, rent collection, or market forces should not impact what is owed.

Under normal circumstances, as the note investor, you are not responsible for collecting rent or dealing with “tenants, toilets, and trash.”

Real estate investors are impacted when a property’s value goes down, tenants do not pay, or capital improvements are required. Note investing mitigates property-related losses.

On the flip side, note investors do not benefit from property appreciation. As a note investor, you trade the potential speculative appreciation for set payments with a defined schedule, interest rate, and term.

When you invest in real estate, you have the right to undisturbed use of the property. If you have leased the property, you have the right to collect rents while your tenant has the right to “quiet enjoyment.”

If you have borrowed money to buy the property, then in addition to your rights of use, you have obligations to pay your loan and maintain the property to prevent it from falling into disrepair.

As a real estate investor, you enjoy both the rewards of appreciation as well as the risks of price correction. If the property’s value goes up, all the appreciation goes to the property owner, not the lender.

If the property’s value goes down, the note is unaffected, the amount owed stays the same, and the same payments must be made regardless of occupancy, rent collection, and market forces.

Dennis  Dahlberg Level 4 Funding LLC
DennisLove.com
Broker/RI/CEO/MLO NMLS 1057378 | AZMB 0923961 | MLO 1057378
9133 W Plum Road | Peoria | AZ | 85383

Comments (2)

Sharon & Bruce Walter
Keller Williams Realty Lafayette, IN - Lafayette, IN
West Lafayette homes for sale

Very good explanation on the pros and cons of note investing vs real estate investing in physical ownership of the property!  

Feb 05, 2021 07:11 AM
Deepak Chauhan
Versailles Property - Irvine, CA
Irvine, CA ... the place to be

Wow, this is knee-deep info. Someday I will invest time in understanding it. Thanks for the post.

Feb 23, 2021 11:02 AM

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