In real estate investing, being the lender can be just as profitable as owning property—without the headaches of maintenance and tenants. Chris Seveney breaks down the essentials of note investing, a strategy that offers passive income and flexibility in today’s high-interest market. He explains how mortgage notes work, why investors are shifting toward this approach, and what to consider before diving in. Whether you’re new to investing or looking for a more hands-off approach, this episode will help you understand the potential of becoming the bank.

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Note Investing For Passive Income: A Smarter Way To Build Wealth

In this episode, what you need to know about note investing and passive income. We are going to rewind the clock as I have been in this business for several years, and sometimes you take a lot of things for granted. I want to rewind and go back and let people know and talk more about what note investing is, why passive investors love this strategy, and talk more about this as a passive investing strategy because it’s something that, over the next 24 to 36 months, is a potential option for a lot of investors. Especially real estate investors who realize the pricing of property is way too expensive. Interest rates are screaming high. You are running numbers on these assets, and it makes zero sense.

Understanding The Basics Of Note Investing

If they are not cashflowing and you are not going to get appreciation in the next few years, why invest in traditional real estate? If you can invest in being the lender and get 8% to 10% on, call it, $100,000 and get $8,000 to $10,000 a year over the next several years and have that liquidity where you can take that money out when the market seems to be in a better situation. Why not consider it? I want to talk about what note investing is because, again, it goes back to an unknown that people don’t understand. Let’s dive in.

Let’s first start with what note investing is. We have shared this a lot in prior videos. Investing in mortgage notes means you are buying debt that’s secured by real estate. It’s what it is and for anyone who’s ever owned a house. I didn’t realize this when I first bought my first house, or maybe I did and didn’t think about it. You sign two documents.

You sign a note, which is an IOU that says, “I’m going to give you $100,000 back over 30 years at this percent interest rate.” The other is the actual mortgage or deed of trust that secures that loan to that asset. That’s something that gives that security. I’m going to start right off the bat. I share that because people lend others money and don’t get that second component. They’ll give somebody $100,000 and the person’s like, “I’m going to go renovate this property,” but they never tie it to an asset.

They never get that mortgage. When things go bad, they are like, “I gave this person $100,000 to go renovate that property.” That property is already sold or gone, and they never securitized it against that property. It’s always extremely important to understand that the security component is an additional step you need to do.

It’s a little bit about note investing. Why do people love it? Maybe love is a little too strong of a phrase, but it is typically something where you can get consistent cashflow potential, meaning people pay their mortgage on a monthly basis and it’s not influenced by the stock market. It’s not influenced by home prices. It’s influenced by the person’s ability to pay that loan. What impacts most people’s ability? Unknown expenses and unknown loss of income. For the most part, unemployment is 4% and 96% of people have a job.

Expenses sometimes can hit but also give you flexibility to work with them. The other reason why I got involved in note investing I will share this story. I have shared this story a thousand times about the time, when and where you can do this and the lack of headaches. I will jump back. More than a decade ago, my wife and I were buying rentals in the Washington, DC, area. It’s great time to buy rentals, by the way.

We were buying and doing the BRRR strategy. Buying them, rehabbing them, and getting all fixed up. After the second one, between my wife, who has experience in finance and knowing about construction, and my background in construction management, we’re managing these projects. After the 2nd or 3rd one, she said, “This is too much. We can’t do this anymore. We have kids. They are young. We have too much going on. We have to find something else.”

I scoured the internet, and I stumbled upon note investing. I wanted to be more active and get on the non-performing side, but I did not realize that there was this whole secondary market of mortgage loans that you could buy. Especially coming out of 2008 to 2012, where there were a lot of contract-for-deeds and seller-financing loans. People had a mortgage and they gave the property back to the lender. The lender kept it in their name so they didn’t have to foreclose again. They wrote a lot of these loans that were $20,000, $50,000, and $100,000 loans.

The barrier to entry was pretty low, but the most important thing that I found relevant to me was that you could do this anywhere at any time, meaning you could do note investing at 10:00 at night. You didn’t have to get an email that says, “You have to be at this property by 1:00.” You get a list of assets, and they are like, “Bid by next Friday.” You could do it from anywhere. You did not have to be boots on the ground.

Fast forward to where the world is you could do your job from pretty much anywhere. Remote work. Note investing was remote work before remote work was a thing. The best way to look at it is because you could do it from anywhere. You could send somebody by the property to take a look at it. That’s why a lot of people enjoy getting involved in note investing.

Differentiating Between Performing And Non-Performing Notes

Before we dive too much deeper, talk about things that have made the terms performing and non-performing and I mentioned that briefly. I want to stipulate performing is what you’d think somebody’s paying their mortgage. Non-performing means they haven’t paid. Most people think non-performing is when you miss one payment. That’s not the case. Non-performing is typically 3 to 4 months behind, but I will say the average loan that we see a lot of times is years behind.

A lot of people think that if you miss a payment, the bank police are going to come knocking on your door and try to evict you and throw you out. That’s not the case. Banks sometimes struggle with managing their defaulted loans. There are policies, procedures, and regulations in place that dictate how long it has to be. I want people to realize that non-performing isn’t like one month. It’s typically four-plus months behind.

Now I want to dive into focusing on why note investing is, I believe, a great passive investment strategy. It boils down to that passive income potential. You get that monthly cashflow without being the landlord. We joke, there are no tenants, toilets, or termites. If a toilet breaks, you are not getting a call. If you own a house, have you ever called your lender and say, “Come fix my toilet. Come fix my roof?” No.

Note investing is a great passive investment strategy because of its passive income potential. Share on X

The other is you also have a servicing company which acts like a property manager who also collects those payments. As a note investor, if you have a strong-performing loan, especially one where the borrower might be on ACH. You just have to check it once a month. Think about it, you have a mortgage. When do you pay? With the 1st, maybe I pay on the 29th and 30th for the 1st. You pay on that day. As the person who owns a loan, you check once a month, did they pay or did they not pay?

I don’t want to say it’s 100% passive, but it’s more passive than being a landlord. As I mentioned, it’s more hands-off. These loan servicers handle all the collections. They handle all the outreach. They handle making sure there’s insurance on the property. They handle updating the payments when taxes or insurance go up. Loan servicers act as property managers. What’s even great is they handle all the tax forms. They do the 1099s and 1098s they do everything.

If the borrower is refinancing, they will handle and letting them know the total amount owed. Now they will come to you and say, “Can you confirm this amount?” They have to, but they handle all of that. That’s what they are experienced in. For those getting into the space, you want to use a service because there are so many laws and regulations around having licenses to be able to do this. It’s something that you want to make sure you have, but again, it’s pretty hands-off.

The other is, if it’s done right, it’s collateral-backed security, where you are securing it to that real estate. I caution people who do loans against land or mobile homes. Mobile homes are more personal property than real property. It’s like a car, which could get wiped out in bankruptcy. Land is not going anywhere but land is much more illiquid than a house.

Part of that collateral-backed security, we like to do it against homes but there are other options to do it against. It’s better than doing it against nothing. One of the things I will mention too about collateral-backed security is you want to be in the first position. What does that mean? You want to be first in line. I see people doing loans for earnest money deposits. I see people doing seconds or 100% or 105% financing. That’s not secured.

It’s called gator lending. It’s a phrase that’s out there where it’s short-term financing to people they had 100% plus. What if that property doesn’t appreciate? If they have to sell it tomorrow, they are paying a realtor and all the costs. Where’s that money coming from? To me, that’s like pawnshop loans or whatever it’s called that people are giving. On paper, you might look at 25% returns, but you are either going to win or lose everything. If you are backing it with real estate in the first position, going up to 50% to 75% LTV, the chances of losing everything are very hard unless you make a major mistake.

Customizing Investments To Align With Your Financial Goals

The other reason why note investing is a great passive income investment strategy is the flexibility. You can customize investments to fit your goals. You can be diverse in regard to how many notes you want to do, what states you want to do, and the type of properties you want to invest in. I view it as being very flexible. Unlike owning property in a certain area where you have to find a new property manager or find this. The servicers are national.

 

You have to do a little more research on certain areas, but when you are getting a loan at 40% to 50% LTV. I don’t think we have ever seen a 50% market crash. You need to know about the area, but you don’t need to know every single little detail fact. Maybe I convinced you that this is a pretty good strategy. If you are getting started, what do you need to know? You can get involved in note investing for $1,000. When I got started, it was under $25,000, and the reason why is that loans on properties don’t always match a property’s value. You can find a $50,000 loan on a $500,000 property.

The other option is you can invest in a fund like our 7E, my company. We have a Regulation A offering open to accredited and non-accredited investors that starts at $5,000. You can get involved in passive investing for $5,000. We provide case studies, stories, and webinars. We provide tons of content and education where not only can you learn more about note investing, but you can also learn about what to look for when you are investing in a fund or maybe there are things you don’t like about what we do.

It gives you that flexibility and diversity because no matter what you hear from me, the one thing that I preach upon because I’m an investor as well is to diversify your portfolio. Don’t put all your eggs in one basket. I will repeat that 10,000 times because it pains me to see people take $100,000, put it in one syndication, and when it goes bad, they lose everything.

 

I saw a post in a forum group where someone invested in a Regulation A offering. When you are non-accredited, you are only supposed to put 10% of your net-worth without your primary residence. It’s not the sponsor’s responsibility to check that. You are self-certifying as an investor. The person said, “I put a lot more than my 10% in. I lost everything. Can I go back after the sponsor?” Unfortunately, the answer is no. You can sue anybody, but I don’t think you are going to have a leg to stand on because when you fill out forms, you mark on the subscription agreement that this is what I’m saying. Go back to diversification.

Continuous Learning And Education In Note Investing

Next is when you get involved in education. Read, listen, and learn. That is what I like to preach. When I got started, I was listening to podcasts around the holidays. I was listening to one person and he starts rambling off all these names that he was thanking. I slowed it down to half speed and started writing all these people’s names down. I didn’t know anybody or anything, then I started researching those people and I got on the phone with them. It’s networking.

Those 3 to 5 people each gave me two people to talk with. The next thing you know, I’m talking to twenty people and kept expanding, growing, and getting to know who the players are. As part of that education, don’t think you know it all because you don’t. Also, don’t approach it as, what’s in it for me? Try to figure out if there are ways to help others. Nothing burns me more than somebody who wants to use me for my information. I can tell right off the bat that this person wants to pick my brain and buying out a free hour of my time. Don’t be that guy. Don’t be that person.

You start educating yourself. You are reading, listening, and learning. It took me about six months of that before I started investing because you need to set your investment goal. Is it cashflow versus long-term growth? What are you targeting? What are you looking for, cashflow or that growth? In note investing, it’s typically cashflow. Understand that cashflow and what the strategy is going to be. If you start making money, are you reinvesting it? What are you using it for? That’s important.

Depending on how active or passive you want to be, there’s your investment route, performing or non-performing. Non-performing is a lot more works. It’s a conflict-oriented business. The returns could be greater, and the losses could be greater. Performing loans typically have less risk. The returns and the risk profile correlate to that.

Lastly, I will say, work with trusted people and platforms. I will go back and share a story. I saw a forum post where somebody made a comment about some education training. People made comments in the group, “Be careful because this person’s reputation isn’t the greatest.” A person asks, “They have all these followers and videos on YouTube.” Being a great marketer doesn’t mean you are a great investor. They are two very different things.

I will tell you, it is a very small business, and if you associate yourself with the wrong people, you will have that scarlet letter. There are people I will not sell to or even take bids from because of who they are affiliated with and I don’t trust them. That’s part of this whole due diligence process. Not only as you get involved in this, but due diligence is also so key. We call the 3Ps the person, the property, and the predicament. Also, understanding who you are working with before even getting into buying an asset. It’s important to know who you work with.

Understanding The Potential Risks Involved In Note Investing

This wouldn’t be me speaking if I also did not talk about the risks to consider. I am a big proponent of note investing, but I’m also a realist. I am not the marketing guru salesperson who slicks back his hair and only tells you all the great things. There’s a lot of risk involved in any type of investing. Anybody who ever tells you something is guaranteed or throws out these ridiculous returns especially in note investing. If anyone’s promising you 15%, 20%, or 25% returns, it’s not happening.

 

Maybe on a non-performing fund where they are splitting profits with you, you can get to the mid-teens. A few years ago, that was achievable. Now, it’s compressed. When I see funds out there sharing 18% on a performing note fund, I don’t see it. Point blank, I don’t see it. Some of the risks, if you do get involved in note investing liquidity. What do we mean by liquidity? You can’t sell notes as quickly as a stock. It takes time. It’s more traditional selling real estate. Expect it to take 60 to 90 days for liquidity. If you are in a fund, understand that the fund might have hold periods.

You can't sell notes as quickly as a stock. It takes time. It's more traditional. Selling real estate takes time. Share on X

There’s default risk. Borrowers may stop paying, but you have to plan for different exit strategies. This is where the property is underwater, meaning they owe more than what it’s worth. That’s a big risk. If there’s equity in the property and they default, you feel much better because if you do have to go the legal route, your loan is secured by that property.

This is probably the most complex regulation and compliance. Staying compliant with state laws is challenging, especially if you are a smaller investor buying 1, 2, or 3 notes because the laws are constantly changing. You are moving states. For example, Maryland came out with a court opinion that now tells you that you have to get licensed. If you are not buying ten loans in that state, it’s not worth getting licensed because of the cost.

We are starting to see a lot more regulation and compliance. With a change of administration, maybe some of that compliance and regulation takes a backseat. These are more state law issues. Not federal government issues. The states are starting to focus on protecting homeowners which I don’t think is a bad thing. Understanding all those regulations and compliance takes time and costs money. It’s something that I’d rather not have to deal with. Maybe I’d rather invest with somebody who deals with this and understands it. That might be better off.

Lastly, working with loan servicers. They handle compliance and collections but understand, they are not perfect. You need to manage them just like you need to manage attorneys. You can’t close your eyes and turn a blind eye. You need to stay on top of them, manage them, and make sure they are doing what you want because, at the end of the day, it’s your loan. They don’t manage it for you. They handle payment collections.

Comparing Returns In Note Investing With Other Investments

As we wrap up, I want to talk about the returns and how they compare. I briefly touched upon this previously regarding returns in this space because there’s a lot of window shopping out there. You see an ad and it’s got a return, but it’s like saying you can buy a BMW starting at $30,000 you’ve got to read the fine print.

On a performing loan, if you are getting 8% to 12%, that is your range. For non-performing, you should target higher. Some people target 15%, 20%, and some 25% but it depends. The higher the target return, the more challenging it could be. As somebody who’s newer in the space, if you are not buying $1 million at a time and you are buying a one-off, it’s not that Costco discount. Realize that as well. You are buying retail.

The higher the target return, the more challenging it could be. Share on X

On performing, if you can get 8% to 12%, that’s your range. Can you squeeze out another point or so on the back end? You can, but that’s where I’d be targeting. When I mentioned this, for example, in our fund, we are between 8% and 11%. You can go do it yourself, or you can look towards us and probably get very close to or even might get better with us compared to doing it on your own.

That’s something that is completely up to you, and we get a lot of people who, after buying a loan or two, realize the amount of work and come back and say, “Let me give my money to somebody else because I don’t have the time.” I do that with stocks as an example. I try and sit there and think, “I want to go buy stocks,” and then realize I don’t have the time for this. Let me have somebody else manage it.

How does that compare with other investments? You are the lender of the bank, and you typically don’t have any leverage on the deal. Comparing it to stocks, it depends on the stock, but I view it as somewhat more secure because it’s backed by real estate versus a product, but it’s a hell of a lot less liquid. Realize that it is not liquid.

With rentals, you don’t have the maintenance or worries, but what you have to worry about is value, damage, and lower price. This is where, again, with the note, you can pick and choose a note based on the LTV. Whereas, you can get the appreciation. You’ve got the upside and the long-term play. There are pluses and minuses if you are looking at a note fund versus syndication. The syndication is probably going to provide higher returns on paper, but they probably leveraged 65% to 70%.

We know what happened in the last few years, which has been problematic, and it’s going to continue to be problematic over the next few years. I can’t see how people buying properties at a 4% or 5% cap and having a 6% loan are going to make money over the next 3 to 5 years. In ten years, you are going to make money, but do you want your money tied up for ten years?

The other thing I will mention is the tax advantage. You don’t have depreciation n notes. Talk to your CPA about the taxes. Typically, owning property gives you depreciation has some slight advantages, but I see people buying real estate because they are like, “It’s tax-advantaged,” but you are not making money on it. Buy an investment that makes money. The tax component I view as secondary. It’s a bonus if I get some depreciation or some upside, but that’s not the primary reason I’m investing in something because of the tax.

Buy an investment that makes money. Share on X

Unless, you made $1 million and you are like, “I’m going to pay taxes and I can’t 1031 it.” Go oil and gas or something but still, make sure it’s a good investment. In some of these syndications that went belly up, people got 100% depreciation, they lost everything, and now they have to go back and pay the IRS back because there was too much depreciation taken. Do understand that.

Key Takeaways And Advantages Of Note Investing

To wrap up this episode, some of the key takeaways that I want to highlight again are, we talked about what note investing is and why I love it. For me, it’s the flexibility of being able to be anywhere, any place and time. You can go between performing and non-performing. It could be hands-off, or you can dip your hands in the cookie jar.

Most importantly, you can get started with a minimal amount of funds. That is the hardest thing people have to grasp. Real estate prices have shot up so high. If you want to be an investor and put 20% down, the average property is $400,000. $80,000 is a lot of money, then you still need money in reserves just in case. With a note, you can get started with $5,000, $10,000, $15,000, or $20,000. That gives so much more advantage over traditional real estate. That is why note investing is a great passive investment opportunity in 2025. Thanks for reading this episode. As always, I will catch you on the next one. Thank you, everyone.

 

Important Link

• 7e Investments