Our guide covers everything you need to know about investing in real estate notes, including benefits, starting with little money, and selecting the right lender.
There are generally three reasons why investors turn to real estate notes:
In this article, we discuss the benefits of real estate note investing in more detail, along with some of the risks involved. We also explain how to start investing in real estate notes without having to underwrite loans or manage foreclosure processes yourself, including through our platform.
Who we are: We, Constitution Lending, are a direct lender with over $200 million originated in short-term loans. Investors can purchase fractions of the loans we originate, starting with as little as $1,000. As the note manager, we handle underwriting and foreclosure procedures. Unlike most lenders, we also invest in non-performing loans (NPLs), having purchased over $40 million in NPLs, which has given us significant experience in efficiently managing foreclosures when loans don’t perform. You can get started by signing up for an investor account.
In simple terms, a real estate note is a written agreement in which the borrower commits to repaying a loan backed by real estate. It outlines key details such as the loan amount, interest rate, repayment schedule, and maturity date.
When people talk about investing in real estate notes, they’re essentially purchasing this agreement from the lender and becoming the new recipient of the borrower's monthly payments. The new note owner holds the same rights as the original lender, meaning if the borrower defaults, the note owner can foreclose.
However, purchasing notes outright requires significant capital. For example, if a property owner bought a $400,000 single-family home with a 70% LTV loan and an investor wants to purchase that note, they would need $280,000. Additionally, the investor should know how to underwrite loans to ensure they are purchasing high-quality notes.
This is why many investors opt for fractional investing in real estate notes. Instead of purchasing the entire note themselves, they can get started with a much smaller amount. With Constitution Lending, investors can begin with as little as $1,000.
There are several types of notes you can invest in, each with its own advantages and disadvantages.
Based on our experience purchasing and originating notes, we’ve found that short-term notes are usually the best option for most investors, given the benefits mentioned above.
Interest rates on short-term loans range from 10% to 14%. As a note investor, you receive monthly interest payments, allowing you to earn higher yields than stocks and bonds.
Real estate notes are safer than most alternative investments because they are backed by physical real estate. If the borrower doesn’t pay, investors in the loan have the right to foreclose on the property.
However, borrower defaults are rare when you invest with a lender that exclusively originates high-quality loans (i.e., high credit score, low LTV loans). For instance, at Constitution Lending, our notes have a default rate of just 2%, so investors are highly unlikely to experience a default.
Additionally, we offer a payment guarantee feature, where we pay you out of our own pocket for up to six months if the borrower doesn’t pay. During this time, we foreclose and sell the property, ensuring you receive a steady, fixed income and are protected against worst-case scenarios.
Because hard money notes typically have a loan term of 6 to 18 months, investors’ exposure to interest rate fluctuations is minimized. With the principal returned relatively quickly, investors can reinvest their principal and returns at the new rate if interest rates rise, rather than being locked into a longer-term, lower-interest investment.
In traditional real estate investing, you, as the landlord, must manage rent collection, repairs, vacancies, and tenant issues. With real estate note investing, however, you don’t manage the property yourself; it’s the borrower’s responsibility. This makes note investing a more passive income opportunity compared to traditional real estate investing.
A common concern for real estate investors is what to do when tenants don't pay. If you own the property, you must handle eviction while receiving no rent. As a promissory note investor, however, the borrower is still obligated to pay you, regardless of the tenant’s payment status.
The primary risk of investing in real estate notes is that if the property value falls below the loan amount, investors may have difficulty selling the property for more than what’s owed.
However, you can greatly reduce this risk by investing exclusively in low LTV loans, ideally below 70%.
LTV stands for loan-to-value, a ratio calculated by dividing the loan amount by the property’s value. For instance, if a property is worth $400,000 and the borrower uses a $280,000 loan to purchase it, the LTV is 70%.
This 70% protects investors if the property loses value. For example, if the property drops in value by up to 30% within the 6 to 18 month loan term and the borrower defaults, investors can still recover their investment by selling the property for 70% of the original value, which is the loan amount.
That said, a 30% loss in property value is extremely rare, as real estate markets typically experience annual fluctuations of only a few percent.
At Constitution Lending, all loans on our platform have an LTV lower than 70%, providing extra protection for investors in worst-case scenarios.
There are two primary ways to invest in this asset class:
Here’s how to invest in real estate notes with Constitution Lending:
Many note platforms simply connect note buyers with sellers. Since they don’t directly invest in the loans listed, they have little incentive to ensure the quality of the loans — anyone can list notes without much curation. As a result, these brokerage platforms are often filled with low-quality notes.
At Constitution Lending, however, we originate all the loans on our platform using our own capital and retain a significant portion throughout the loan term. This means our success is directly tied to the performance of the loans you invest in, ensuring the quality of our offerings.
We started out investing in non-performing loans, meaning we have experience in foreclosure, asset recovery, and underwriting. This experience has enabled us to effectively manage distressed assets, mitigate risks for our investors, and maximize their returns.
Additionally, we aren’t just a lender — we are real estate investors who own properties ourselves. This gives us a unique perspective that most lenders don’t have, as we can use our real estate investing knowledge to originate profitable and high-quality mortgage loans.
With Constitution Lending, we have a payment guarantee feature that'll pay you up to six months of repayments if the borrower defaults. Basically, you'll be receiving cash flow even though we aren't. Within these six months, we work to foreclose on the rental property and sell it, returning you with your principal investment and returns.
You can start investing in real estate notes with as little as $1,000 by creating an investor’s account here.
The best way to make money with real estate notes is by fractionally investing with a lender. Unlike buying entire real estate notes, which can cost hundreds of thousands of dollars, fractional investing lets you start with a much smaller amount, typically around $1,000.
Note investing is generally more profitable than stocks and bonds. Interest rates on short-term loans are around 10% to 14%, meaning investors can receive 10% to 14% annual returns. On the other hand, stocks and bonds average around 5% to 9% annually.
Investors can buy notes directly from banks, note brokers, hedge funds, individual sellers, or other financial institutions. Additionally, investors who don’t have the capital to buy the entire note can invest fractionally with a lender for a much smaller amount.
Mortgage note investing is a good idea if you invest in high-quality notes (i.e., high credit score, low LTV notes). Note investing enables investors to see high yields, around 10% to 14%, significantly higher than high-yield CDs and stocks. Additionally, notes are quite safe because they are backed by physical real estate.
The risk with investing in real estate notes is that if the property's value falls below the note's value, i.e., the loan amount, investors may not be able to sell the property for more than what the note is worth. However, investors can reduce this likelihood by investing in safe, low LTV loans.
The best way to get started with real estate note investing is by fractional investing with a lender. This approach is less capital-intensive than buying notes outright, and the lender handles underwriting and loan servicing, so you don’t have to.
| 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 |