Estimated reading time: 1.5 minutes
In Part 1 of Self-Direction and Real Estate Notes we discussed how to invest in real estate notes, secured notes, and their potential benefits.
One of the benefits we mentioned was the steady, passive income stream generated by the borrower’s payments on your note. When a borrower is diligently making their payments, thus keeping the note and its terms in good standing, that’s what we call a performing note. However, when a borrower defaults on their payments, eventually ceasing altogether, it’s considered a non-performing note.
Though it may seem counterintuitive, some investors buy non-performing notes intentionally. If the non-performing note is secured it can be a cheap way to buy real estate once the eventual foreclosure of the property takes place.
The alternative to secured notes is unsecured notes. Unlike secured notes, unsecured notes are not backed up by collateral. They are generally considered to be riskier than secured notes. Should things go awry with your investment, secured notes are imbued with a clear path to recovery; unsecured notes are not.
However, unsecured notes do come with a higher interest rate and thus rate of return, which accounts for most of their appeal.
The other factor that some investors find appealing is quite simply the ability to help the borrower. A borrower seeking investment in an unsecured promissory note is likely to have few assets and poor credit. Borrowers generally seek notes after more conventional means of procuring funds (e.g. a bank loan) have failed. In this way, investing in, for instance, mortgage notes is an opportunity to bring some altruism into your investment portfolio.
Curious to learn more about notes and similar investment strategies? Check out our webinar recording: How to Grow Your Self-Directed IRA with Peer-to-Peer Lending.