Have you finally decided to become a successful passive note investor? Join Chris Seveney as he breaks down the essentials of passive investing and how you can begin with it right away. Learn how to educate yourself, define your investment goals, conduct thorough due diligence, mitigate risks, and monitor your performance. Chris covers everything from understanding note and mortgage fundamentals to choosing the perfect investment path – whether it is direct investing, joining a fund, or partnering with a pro. He also dives into the critical steps of setting up your investment and tracking your returns, acknowledging the upfront work while showcasing the incredible potential of passive note investing.

—

Watch the episode here

 

Listen to the podcast here

 

Your Guide To Becoming A Passive Note Investor

Thank you for tuning in. If you’re a returning reader, I appreciate you. If you are new, we provide tons of content on mortgage note investing, passive investing, and the strategies to move your game to the next level. We will talk about passivity in note investing, how it is passive, how to educate yourself, finding investment goals, and choosing the right path along with the type of due diligence you need to conduct, mitigate any risk, how to set up an investment, and monitor performance, and then we’ll wrap it up with some final thoughts. Let’s dive right into it.

Mortgage note investing, I continue to harp on and give people an education and understanding of what that is. The simplest thing I like to tell people is instead of owning the property, you own the loan. You are collecting payments from the borrower.  You’re not dealing with tenants, termites, or toilet repairs. You are not the upkeep. You can proverbially sit back, kick back, relax, and watch the money flow.

 

If it was that easy, everyone would be doing it, so there is some active component to it, but if you do the right things, you can make it pretty passive. If it is passive, it has these benefits. It has cashflow and diversification. If you’re doing it right, the collateral is backed by real estate, which is something you can physically touch, see, and feel. It’s not any type of crypto. It’s not giving somebody money for an earnest money deposit on something. It’s backed by real estate.

How To Educate Yourself In Note Investing

Let’s dive into the first thing you should do, which is educate yourself. How do you educate yourself? First, tuning in to this show is a great start. I’ve got 200-plus episodes. I used to do the Good Deeds Note Investing podcast. I have a YouTube channel. I have a membership group. The membership group is the only thing I charge for. It’s $100 a month, which is to keep the lights on. I don’t use it as a profit center. It’s not my main motivation to make money in notes. I am very much against the whole guru system of people charging ridiculous amounts of money to teach you something. Most of what you need to learn can be found online for free. In my group, what we like to talk about and share is real-world case studies of what people are going through and answer questions. It’s more of a mentorship.

What are the basics? First, it is understanding the difference between a note and a mortgage. A note is the IOU. The mortgage is the ball and chain that securitized that IOU to the property. I didn’t know that before I bought my first house or even after I bought my first house. We want to understand what’s a note, what’s a mortgage, what’s performing, and what’s a non-performing type of loan. Performing is borrowers making payments and maintaining insurance taxes. Non-performing means they’re not in compliance with the agreements they have. 1st position and 2nd position loans, what does all that mean? We talk about all of this in all of our other episodes so I’m not going to deep dive into it.

Understand the lingo. We provide a free reference manual. Learning notes is like learning a new language. I’ll share a story of when I was back in the heyday of doing some construction management. I was doing a job for the government. If you want to talk about acronyms, the government has more acronyms than you can shake a stick at. We were doing a building for USALSA, which is the United States Army Legal Services Agency. They’re the top dog lawyers of the Army. They have acronym after acronym. I felt like I was learning a new language. I was asking, “What’s that?”

Learning notes is like learning a new language. Share on X

Note investing is the same. You’ve got UPB. You’ve got LTV. You’ve got WAC. You’ve got IR. You’ve got IRR. You’ve got Payoff. You’ve got the DPB. There are so many acronyms they throw out there that it is something that you want to learn, and not only learn what they are but what they mean. How are they relevant? How are they important? Setting that foundation or building block is understanding those key terms.

I’ve said this in the past. I spent six months educating myself. A good portion of that was building out a calculator to figure out how to calculate returns. It’s not as simple as people make it out to be. Remember, anybody who ever builds any type of model or calculator, it’s wrong the minute you hit Enter because you’re forecasting the future. Nobody can forecast the future. You’re guessing. Garbage in equals garbage out. You want to make sure your data is as accurate as possible.

Some other places besides me talking about myself and all the educational content I throw out there are podcasts, blogs, and conventions you can attend. For example, the Paper Source seminar, which is going to be coming up in September 2025, is a great avenue to learn more about note investing as well. There are Facebook groups. I have a Facebook group, Creating Wealth Simplified Through Note Investing. You can also connect with other communities and forums.

I talk a lot about what we provide. There are a lot of other webinars out there of industry leaders. There’s Beth Johnson, Fred and Tracy Rewey, Marco Barrios, and Jamie Bateman. I could rattle off another 50 more. It’s a very small niche space so you’ll see the same names coming up over and over again. One thing I’ll mention though about some of these names is to do a little background and due diligence on them because there are some good people in this space and there are some bad people in this space. Typically, the ones who have the worst reputation are the best marketers. Be careful of that.

The ones with the worst reputation in the note investing space are usually the best marketers. Share on X

How To Set Investment Goals For Note Investing

Another component of figuring out as you get started is finding your investment goals. In note investing, are you looking for monthly income and long-term growth? If you are looking for long-term growth, that is probably not the right play. Note investing is typically an income stream where you want those monthly payments. Go down the rabbit hole of long-term growth through non-performing but that’s not passive. That is extremely active. You need to understand that.

I like to always use this analogy. Go to a waterpark. I like the lazy river. That’s where I want to hang out. If that’s what you’re looking for, note investing is for you. If you’re looking for those water rides that go straight down into the tube, that’s non-performing notes. Those are great too but understand what the risk tolerance is. There’s a lot higher risk in those compared to the lazy river. It doesn’t mean the lazy river can’t go bad or deals don’t go bad, but what is the time and effort you want to spend? How much capital are you willing to invest as well? You have to evaluate.

Once you decide, “I’m thinking monthly income,” what’s your risk tolerance? If you do 100% financing on vacant land, it’s a lot riskier than buying a seasoned loan from 7 years that the borrower has been making payments and it’s a $50,000 loan on a $200,000 property. They could have the same payment and the same everything but one has a much bigger risk profile than the other. Understand that. It then goes back to how much capital you are willing to invest. If you put all your eggs in one basket, you want to diversify.

Choosing The Right Path In Note Investing

All of this should align with your overall financial strategy. You can’t let someone dictate it for you. You need to understand. Cashflow is okay. Appreciation is probably not the game unless you’re choosing to go for non-performing. Anybody who tells you that is passive, they’re full of it. Even performing loans are passive but there’s a little bit of activity there. It’s not as much as owning a property but there’s a little bit. If you want to go off to the fund model and invest in a fund like ours, that, to me, is truly passive. Some people are control freaks and don’t want to lose control. That’s up to you. That’s something you have to decide. That rolls into the next, which is choosing the right path.

 

You directly buy notes from the secondary market. Maybe I originated a note and you call me up like, “Do you have any notes for sale?” You buy a loan from me. You’ve got somebody five houses down that bought a house for cash and they ran out of money and are like, “Does someone want to give me $50,000 to finish off construction on this house?” The first position note is you give them a $50,000 loan for a year with no private lending. They pay you and then you go to the next one.

Maybe you have a rental property that’s paid off or does that mortgage and you want to sell it. You seller-finance it. You can figure out how to write and originate that loan and you originate a loan. Those are three options right there that you can go down. Those are three of the things we’re going to be talking about at Paper Source and the three paths that people can go down.

The other option you can do to be passive is to invest in a mortgage note fund. For example, talk about ours. As of this recording, we have 50-plus assets in it. I’ve got a team of seven that are managing the fund. You can get started with $5,000. There’s risk investing in a fund. It’s not guaranteed. No investment is guaranteed. Anyone who tells you that is full of it. To me, I view that as a lot more passive. You’re investing in a diverse portfolio compared to the one-off asset. It gives you some education on how to vet a sponsor but also see how they operate. If it’s something you want to do, you can see how we handle our assets.

The flip side of that is maybe you partner with an experienced investor and do a joint venture or mentorship opportunity. Jamie Bateman, who I’ve done deals with in the past, does mentorship. I don’t know if he’s doing joint ventures or not. He has a small fund as well. Some people partner and do a JV. People who think that going into a JV they’re going to be learning a ton, you learn a lot but it’s not as much education as you think.

 

I’ll give an example. The sponsor, let’s say, has five loans. Something comes up where they need to talk to an attorney. They reach out or an attorney calls them and that attorney is on all five loans. That attorney is going to run down every single loan and talk about each one. That person is not going to have time to be like, “Let me get my JV partner in on this call as well.” You’ll hear the transcription of it. A lot of people think, “In JV, I’m going to be in the throes of it,” but it doesn’t happen that way. I tried it when I started to do it that way. I was upfront with people when I started and was like, “I thought I could do this this way. I can’t. This is how it’s going to be.” Everyone was okay with it. It’s all about communication.

Note Investing Due Diligence Guide: Avoid Costly Mistakes

That rolls into what I want to talk about next, which is the due diligence side of things. We talk a lot about the three Ps, the Person, Predicament, and Property. Person is in regard to their payment history. Did they file for bankruptcy? Do they have a criminal record? For Property, what’s the property value compared to the loan balance? Are there any lien issues on the property? What’s the condition of the property?

Predicament is what happened. Why are they behind? Death, disability, job loss, and divorce are primary but some people are bad at money. For the people who are bad at managing money, typically, history repeats itself. When you see that, you have to understand, “What are the legal considerations? What are the foreclosure timelines? How does all of this work?” This is where you work with loan servicers that I mentioned, good counsel, and good attorneys.

I mentioned active versus passive. People think, “I bought a loan.” It’s passive, but buying a loan is a lot of upfront work. There’s all this due diligence. You figure out what systems to use, what servicer to use, where to order all this information, and where to find the attorneys. The other component that I learned the hard way early on was lost opportunity. I’d get 5 loans under agreement and start due diligence and 4 of those 5 were junk. The title issues that they were representing didn’t happen.

I spent $250 per file. Times 4, it’s $1,000 gone. You can’t go back and collect it as part of due diligence. It’s like doing a home inspection on a house and saying, “This house is structurally falling apart.” Some of these sellers don’t know what they have. It’s the same thing. You’re like, “I’m not buying this,” but spend $500 or $1,000 on a home inspection.

Due diligence is like doing a home inspection on a house. You know nothing until you do the work. Share on X

It’s similar to notes. A lot of times, I see people that when they get started, they start and think, “It’s great. I’m excited. I’m going to learn this. I’m going to be passive,” and then realize it’s money after money they’re throwing out there because they also aren’t good at spotting what type of loans may or maybe not be problematic or know which sellers sell problematic loans. They end up calling me up and saying, “How do I invest in the fund? In my membership group, I share all this information with people. I give them lists of servicers and legal advisors. As passive as it is, and it is passive once you get the loans, there’s that upfront work that you have to do.

I talked about all that due diligence you have to do upfront and stuff. The next part is setting up that investment to monitor your performance. How are you monitoring performance? How are you tracking payments? How has all that happened? If you invest in notes, I highly recommend using a self-directed IRA. Reach out to us. We have companies we enjoy working with and companies we think do a good job. I’m happy to share them with you. Get an account set up with a loan servicer so they can handle the collections, payments, and compliance, and then monitor and track your returns. It’s like, “Did you set up an LLC for this? How are you tracking all that?” In note investing, I recommend setting up the LLC and going through that process.

There is a lot to unwrap. I started with how wonderful it is and how passive it is. It is, but it’s like anything. You have to get everything set up, and that takes time and effort. Once you get there, you can reap the benefits. If this isn’t something that you want to get involved in, that’s where that fun route and other types of options come into play.

Either way, note investing is a great strategy in 2025. I encourage you to take the step to learn about it or learn more about it. I’m always somebody who loves to absorb, get educated, and learn new things because it enhances all the other skills as well. I want to thank you for tuning into this episode of the show. Check us out at 7EInvestments.com where you can learn more about our company, our offerings, and our membership. As always, make sure to leave us a review on your favorite station. Thanks for tuning in. We’ll catch you in the next one.

 

Important Links

• Creating Wealth Simplified Through Note Investing on Facebook
• 7E Investments on YouTube
• 7E Investments on Instagram