NOTE INVESTING: REAL ESTATE’S BEST
KEPT SECRET
WHAT IS A NOTE?
When looking to buy a home, potential homeowners borrow money from financial institutions such as banks. The
promise to pay back this loan is called a note. Once the potential homeowner qualifies for the loan, the note is
signed, and for the life of the loan, the homeowner makes monthly payments to the financial institution that
granted the loan.
Sometimes for various reasons, the owner of the house finances the sale of his or her own house. This is called
seller financing. In other words, the seller is also the note holder. The new homeowner then makes monthly
payments to the seller instead of a bank. This arrangement speeds up the sale, and it allows a borrower whose
credit report may have a few blemishes on it the opportunity to purchase the home. In situations like this, the
seller does not need a lump sum of cash immediately, and by seller financing, the sale of the home becomes an
investment. Interest is charged and accumulated over time, netting the seller a return on his investment larger
than simply selling the home for a lump sum.
COLLAPSE OF THE HOUSING MARKET
To protect themselves, financial institutions have historically required borrowers to qualify for home loans.
Income, credit history, debt ratios, and down payment are some of the qualification criteria used to determine the
creditworthiness of the borrower.
However, during the mid-2000s, the qualification criteria to borrow money for home purchases was relaxed, and
subprime lending skyrocketed. Subprime lending is the practice of lending money to those that may have problems
repaying the loan. Unfortunately, this practice turned out to be detrimental to the U.S. economy. Foreclosures hit
record highs, and many financial institutions failed. Coupled with high unemployment, the real estate market was
devastated.
In the aftermath of this economic nightmare caused by subprime lending, financial institutions have stiffened their
lending requirements. Experts say that between 50 and 80 percent of the people who once qualified for home
loans no longer qualify. This is not because credit scores have declined. It is simply because the banks have made
it tougher for individuals to qualify for home loans, leaving many hardworking Americans unable to purchase
homes. Fewer qualifying buyers also makes it difficult for those trying to sell their homes.
INVESTMENT OPPORTUNITY
The subprime lending that caused the country’s financial crisis beginning in 2007 and the subsequent stiffening of
lending requirements has created a unique opportunity to invest in real estate. For investors looking for relatively
safe investments with returns higher than savings accounts and CDs but without the uncertainty of the stock
market, investing in notes is a viable option.
The note investor acts as the bank, financing the purchase of the home. In so doing, the investor becomes the note
holder. The new homeowner is now obligated to make monthly house payments to the investor until the loan is
paid back. This can provide a steady stream of income for 10, 20, or 30 years. As an additional benefit, owning
notes in an IRA or Roth IRA can add security to one’s retirement, providing an extra source of income in one’s
golden years.*
Financial institutions also sell notes that they have held for a number of years. These notes may only have 10 years
of payments left on them for example, making the notes less expensive than when they were first created 20 years
ago.
Buying notes provides an opportunity to invest in real estate without the hassles that accompany owning rental
property. The investor who holds the note is not responsible for the home, unlike a landlord who has to make sure
the property is maintained. The homeowner, unlike a tenant, is responsible for all the expenses connected with
the maintenance of the home.
SECURITY OF THE INVE STMENT
Though few investments that provide a decent return on investment are without risk, investing in notes provides
some security to the investor. Notes are backed by the real estate and a mortgage. In cases where the
homeowner no longer makes the payments, the mortgage gives the note holder the right to foreclose on the
property. In situations like this, the home can then be resold to another buyer, and the investor once again
becomes the holder of the note. Due diligence is given to find quality and creditworthy home buyers to mitigate
the chances of foreclosure. Oftentimes having equity in the home is also a mitigating factor.
AMERICAN HOMES REAL ESTATE INVESTMENTS LLC
American Homes Real Estate Investing LLC provides the opportunity for individuals to invest in notes. We connect
investors with notes from our various sources to provide them with long term and consistent growth on their
investments. We work with title companies to close all transactions. We hire third party companies to collect the
house payments, to make the insurance and tax payments, and to distribute monthly payments to the investors.
In the unfortunate occasion that a foreclosure has to take place, we do all of the work so the investor can be just
that: an investor.
*All IRAs and Roths do not allow real estate investments. We can recommend companies that can set up an IRA/Roth that allows real estate
note investments.