Our guide shows how to buy mortgage notes with just $1,000 and no prior experience.
A mortgage note is a legal document between a lender and borrower that outlines the terms of a mortgage. The person who owns this mortgage note also owns the loan and receives monthly payments from the borrower.
Buying mortgage notes has gained popularity as an investment due to their high yields — short-term notes can return 10% to 14% annually. They are secured by physical real estate, allowing note holders to claim the property if borrowers default.
If you’re looking to buy a mortgage note, there are three ways to do it:
In our experience both buying mortgage notes as well as originating our own, we’ve learned that fractionally investing with a lender is usually the best option for most investors. This is because:
Below, we discuss these benefits in more detail, factors you should consider when investing in mortgage notes, and what sets us, Constitution Lending, apart from other mortgage note platforms.
Who are we: We, Constitution Lending, are private money lenders that have originated over $200 million of hard money loans with our own capital since being founded in 2018. As an investor, you can buy portions of the loans we originate. You can start with as little as $1,000 and don’t have to worry about all the manual work, such as underwriting; we take care of that. Get started by opening an investor’s account.
With fractional note investing, you can buy fractions of the loans that a lender has originated; you don’t have to buy the entire note yourself. This lowers the barrier to entry and allows investors to diversify into a portfolio of quality mortgage notes with less capital.
With Constitution Lending, you can get started with as little as $1,000.
A limitation with purchasing entire notes is that you’re less diversified. If you buy a note and the borrower doesn’t pay, you won’t receive monthly payments until you renegotiate or foreclose and sell the property.
With Constitution Lending, you are more diversified because you can invest in multiple notes at once. We also offer a payment guarantee feature (more on this below) where you’ll receive your monthly repayments even if the borrower doesn’t pay.
In addition to being expensive, purchasing entire notes requires a lot of time and real estate investing expertise. You must be familiar with underwriting loans, servicing the loan, and foreclosing efficiently when there is a default, which makes it impractical for the average investor working a full-time job.
However, when you’re a fractional investor in a note, you can take advantage of another lender’s underwriting expertise as they will underwrite the real estate investor’s financials (conduct credit assessments, appraisals, etc.). Fractional investing offers passive income while entire note purchases require more work.
To maximize returns and minimize the risk of default, there are four things you should consider when investing in this asset class:
The primary risk associated with mortgage note investing is that if the property's value drops below the note’s value and the borrower defaults, note buyers will find it difficult to sell the property and recover their investment.
This is why the main factor you should consider in a note is the loan-to-value ratio (LTV) and after-repair LTV. Loan-to-value is a ratio of the loan amount divided by the property's value. So, a loan on a $1 million property with a $300,000 down payment has a 70% LTV (a $700,000 mortgage).
As an investor in the note, a lower LTV is considered less risky because the borrower owes you a smaller fraction of the property’s value, so if the property loses value and the borrower stops paying, you have more of a cushion to recover the loan principal by selling the property.
We recommend conducting proper due diligence and investing in notes with an LTV below 70%. This 70% LTV means that if the borrower defaults, as long as the property doesn’t depreciate by 30% or more in six to 12 months (the typical length of fix-and-flip loans), you can still sell the property and recover at least the loan principal ($700,000) amount.
Depreciation by 30% in six to 12 months is extremely rare. For example, the real estate market in 2008 saw one of the biggest declines, and that was “only” a 20% to 30% drop in most cities.
In contrast, if the LTV were 95%, then any drop in property value greater than 5% would risk principal loss. Hence, lower LTV loans are less risky for the note investor.
(Finally, keep in mind that because fix-and-flip notes involve renovating the property and increasing its value, they further reduce risk because you are able to sell the property for a higher price due to the renovations.)
At Constitution Lending, we originate loans with a maximum LTV of 70%. This has contributed to us never incurring a principal loss.
You should also consider whether a mortgage note has a payment guarantee feature that’ll pay you in case the borrower misses their payments. This obviously won’t apply to non-performing mortgage notes.
With Constitution Lending, you don’t have to worry about not receiving payments if the borrower defaults because we offer a six month payment guarantee feature on all of our loans. During these six months, we’ll foreclose on the property, sell it using our network of borrowers, and return you with your principal and interest. We’ll pay you even if we aren’t receiving payments ourselves.
In order to determine the returns you can expect, look at the loan's interest rate.
Finally, consider the note's lien position as it dictates the order of claims to the property in the event of default. First lien note holders are paid first when the property is foreclosed on and sold, while second lien note holders are paid afterward.
When you invest with Constitution Lending, you become a first lien note holder and get priority in case borrowers default. The borrower needs to lose their entire investment before you lose a penny.
Here’s how you can invest in mortgage notes with Constitution Lending:
Three key factors differentiate us from other note platforms:
At Constitution Lending, we originate all the loans on our platform with our own capital. This means it’s in our best interest to only originate high-quality, low LTV loans because if we don’t, it’s our money on the line.
Similarly, many note platforms sell mortgage notes to investors without retaining any of their own capital toward the end of the loan term. This poses a problem, as they lack a financial incentive to ensure borrowers pay off their loans. They can originate bad loans and sell the entire loan to investors without impacting their bottom line.
In contrast, at Constitution Lending, we always own a significant portion of the notes. This ensures we have a vested interest in originating high-quality loans that perform as expected.
Many potential note investors we speak with are concerned about what happens if the borrower doesn’t make their monthly loan payments. Will they still receive their monthly payments?
To protect against missed payments, we offer a payment guarantee feature that pays investors up to six months’ worth of payments if the borrower defaults. This means you’ll continue receiving your monthly payments even if we aren’t receiving anything from the borrower. No other note platform provides this level of protection.
Here’s what investors say about Constitution Lending:
Since 2018, we’ve helped both new and experienced note investors capitalize on high-yield fix-and-flip loans without requiring a lot of capital. To date, we’ve originated over $200 million in loans; this includes residential rental property, commercial real estate, and distressed homes.
You can start investing in notes by creating an investor’s account.
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| Qualification | Requirement |
|---|---|
| Minimum and maximum loan amount | $150,000 to $3,000,000 |
| Type of property | Non-owner occupied single-family, multi-family, and 5-8 unit properties |