Invest in Real Estate Or Mortgage Notes?

Real Estate Investing vs Mortgage NotesSit around any after-hours event at an industry convention and you will soon find a heated debate about investing in Real Estate vs. Private Mortgage Notes.

Oftentimes people are in one camp or the other (myself included). But which one is better?

Well, “better” really depends on your personal investing style.

Are you the kind of person that needs to see and feel the asset? Do you want to drive by the property on a regular basis to be sure that it has not burned down?

Or, are you the kind of person that would like to simply track your investing gains in an excel spreadsheet?

Certainly there are pros and cons to both real estate and note investing.

On the real estate side, you have the opportunity of a significant uptick in value through appreciation. Conversely, you can also experience a significant decrease in value. (We can all feel the recent sting from the last downturn).

For me, Real Estate is stuff.

It is a hard asset that needs to be maintained. If you are renting it out, you have tenants. If you are under the impression that tenants simply mail you checks every month and you don’t hear from them often… guess again.

Anytime something is happening with the property they are quick to dial-up the landlord.

Toilet is plugged up.

A gutter came off the roof.

The mailbox is broken.

My kid broke two windows.

You name it – it will happen.

Aside from the constant communication with a renter, you also have a property that needs constant upkeep. The roof, paint, landscaping are just a few of the common ones and that’s forgetting for a moment the property taxes and insurance.

Yep, real estate is work.

For me, Notes are the best of both worlds.

The reason I like private mortgage notes so much is that I feel you get the best of both worlds.

Notes are typically secured by real estate. The asset is the home, business, or land…and you always have that collateral to go back to.

Secondly, you don’t get the calls.

When was the last time you called your bank when the water heater broke or the roof started leaking?

Well, you don’t. I mean you could call them but they would just laugh and say, “Bummer, don’t forget to mail in your mortgage payment.”

With notes you are effectively the “bank.”

If everything goes according to plan, you will receive checks each and every month – all the while earning a pre-determined return on investment.

IF something was to go wrong (as in the buyer stops paying) you have every right that a typical bank does. You can foreclose on the property and sell it for cash (or create another note).

Lastly, with notes, you have a much better way of minimizing your risk. You have may have a $130,000 property as the underlying asset, but only be in the deal, say, $50,000 or 38% Investment to Value – Pretty good likelihood on not losing your money on that one!

Yep, for me, Private Mortgage Notes afford the investor a flexibly like no other in the real estate market. But, I am sure we can debate this the next time we meet. 🙂


  1. andrea guevara says

    Hi everyone,
    I am in Concord, Pleasant Hill, Walnut Creek areas in CA and I am looking for a mentor hands on in this area, if anyone know or willing to help, please let me know
    thank you
    thank you
    Andrea Guevara

  2. Notes are great form of investing. Like most people I started out with buying and fixing (what a waste) tenants could destroy faster than I could ever keep up with them.

  3. Both investments have merit but with investment real property you can upgrade conservatively over the years, e.g. no mortgage, and each time you upgrade never, ever have to pay taxes if you 1031 Exchange.

    With Notes you pay taxes as you go.

  4. Notes are the key! When I started I began rehabbing in older areas some considered war zone areas etc. and adding value back to the neighborhood and then renting. I enjoyed deal analysis, inspection, and the house transformation it was for fun and wealth building I thought. After vandalism, tenant abuse of home, repairs, decline in Section 8 vouchers, vacancies when market decline I decided landlord is not the best option. The ONLY reason to buy and remodel a home is to offer seller financing. Conclusion seller financing and NPN are the best form of real estate investing.

  5. Carlton White says

    Investing in real estate or notes is not even a debatable issue. An understanding of the financial markets means you understand the difference between equity and debt instruments. It means you understand that interest rates are the costs that none pays for borrowing money. You understand that stocks and bonds have value because the issuer has valuable assets and good management.

    In other words its all a paper game and interest rates dictate how much someone will earn; low risk means low rates of return; high risk means high rates of return. An investor in real estate can invest in both real estate and notes; I think the quote “real estate for growth and notes for cash flow” can be attributed to Jimmy Napier. Still usually most start out investing in real estate and then get in the paper business. And keep in mind that when buying paper one must make sure the underlying security has marketability value and hasn’t diminished in value due to deferred maintenance.

    Investing in paper or real estate then should then be considered a matter of personal preference and the knowledge of the investor. When an investor has all the growth they need and wants more cashflow they can increase their paper portfolio.

  6. When I was investing for the long-term, real estate was definitely the way to go. I chose luxury condominiums in a great location. I have had a significant appreciation in both value and income. Now I, personally, only invest in short-term Notes with a high interest rate. I think the answer lies primarily with your stage of life and financial situation.

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