Real Estate Note Investing: Using Mortgage Notes to Passively and Massively Increase Your Income

by Dave Van Horn

Welcome to the other side of the real estate business! Do more deals, maximize your current portfolio to its full potential, and decrease risk―all through mastering finance and leverage in this introduction to the note investing business.

Whether it's through mortgages, student loans, or credit card debt, nearly all of us (especially real estate investors!) are in the note business. The trouble is, most people are on the other side of it: writing checks to note owners rather than cashing checks as note owners. Understanding how to utilize basic note and financing concepts explained in this book will help real estate investors like you to:


Borrow smarter by making debt your friend. Raise money for your investments easier by understanding and appealing to private investors. Squeeze more profits out of the deals you're already doing by utilizing creative offers and multiple financing strategies. Scale your investing through a passive investment vehicle that is backed by hard real estate without the tenants, termites, or toilets. Use note investing to pay for expenses like student loans and life insurance, or simply to provide additional cash flow for you into retirement. Become the bank and begin to use every form of leverage you have available! Not another cookie-cutter "how to" book, Dave instead takes readers on a journey with him as he looks back over lessons learned across three decades of real estate investing, and the path that led him to his success today in the note industry. He teaches by example, illustrates with real-life stories, and gives a 30,000 ft. view of the note space, introducing readers to a new way of investing.

So whether you're a wholesaler, rehabber, landlord, or even turnkey investor, reading this book will help you turn your focus to the "other side" of real estate. For both new and experienced investors alike, no matter where you are in the real estate business, the strategies in this book can help you build sustainable wealth today and for years to come.

Genres: Business

205 pages, Paperback

Published June 1, 2018

Reviews

[Paul Winterowd · Rating 1 out of 5]

Wow! Could have been great, 95% fluff. I wanted to learn about note investing, not get a play by play of the author's flipping business. Lots of bark, very little bite on this one. Had high hopes and was greatly disappointed.

[Amanda Flores · Rating 4 out of 5]

Book has some nice nuggets. Lots of personal experience with inspiration sprinkled in.

[Dustin Witmer · Rating 4 out of 5]

The advice on the notes business was good, but not spectacular. I actually got more out of the first several chapters that talked about his own journey. It’s definitely worth a read even for real estate investors that aren’t looking to buy notes.

[Harry Harman · Rating 5 out of 5]

Jimmy Napier a so-called founding father of note investing and the author of what is now probably the most famous book on note investing ever written, Invest in Debt.

“You’re probably already in the note business. Almost everyone is. Most people just happen to be on the other end of it.” Most of us tend to be on the side of the borrower, the one making a payment on a note, rather than being on the side of the lender that receives the payment, like a bank.

a note (or a promissory note, as it’s officially called) is a promise to repay a loan. A mortgage is the recorded document that attaches that loan (also known as a lien) against real property that secures the note.

In the United States, with government approval, banks help create growth and finance loans by leveraging depositors’ money. They do this by borrowing against depositors’ capital (up to seven to ten times, depending on the status of the bank and its reserve requirement) from the Federal Reserve (a.k.a. the guys who print the money!) for a fee so they can then lend even more money out to bank customers for an even larger fee than what’s paid to depositors.

This growth is usually connected to new construction, business loans, consumer loans, auto loans

“It takes money to make money… but it doesn’t necessarily have to be your money that gets you there.

I’m cofounder of a company that owns and manages more than $100 million worth of institutional notes

Think like a bank. I quickly learned that banks already have note investing all figured out.

I always look at a purchase with two questions in mind:
• How much will I have to spend out of pocket?
• How long will it take to get my money back?

it cost me $9,577.50 out of pocket on paper. I was able to cash-flow $4,891.56/year. I would have all my out-of-pocket money back in less than two years.

That makes the interest payments a whopping total of $80,355, or a 143 percent return on the bank’s money over thirty years.

The etymology comes from Old French (derived in Latin). Gage means “pledge,” and mort means “death.” So put together, a “mort-gage” is a “death pledge”! it really referred to the death of the debt instrument when it was paid off, not the homeowner.

A bank would pay more than it’s worth for future potential revenue from a loan with what they deem to be a quality borrower. So a mortgage like this at $63,000 might sell for $65,000. This quick return varies depending on the market, the quality of the borrower (and his or her credit score), and the loan itself.

I actually obtained the loan through a loan originator who was a friend of mine. Most loans are issued through either a mortgage broker (on behalf of banks) or a loan officer at a bank or mortgage institution.

The gradual repayment of both the original loan amount and the accumulated interest is called amortization.

the majority of residential property owners keeping their mortgage for an average of only five to seven years

Net Interest Margin

Banks operate very differently from most businesses because they are highly leveraged, with more than $20 in debt for every $1 of equity. The bank earns money on the spread between the rate of interest it pays out and the rate of interest it charges on loans. This is called the net interest margin.

occasionally a bank may run low on cash and need to borrow short-term funds from the Federal Reserve. These loans are made at a low interest rate, commonly referred to as the Federal Reserve discount rate. What’s unique about this strategy, called fractional reserve lending,8 is that the bank has lending power on capital it doesn’t necessarily have in-house.

Americans spend more than they save, and the bank knows this. This is why it got into the credit and debit card business, especially once they implemented revolving balances. So every time you swipe a card at a store, the merchant pays a small percentage of the money to the bank that issued the card, calling it an interchange fee. For credit cards, this is around 1.7 percent, while for debit cards, it is closer to 1.1 percent.

In the United States today, the average household ends up paying more than $200 annually in just overdraft and bounced-check fees alone.

Along with the interchange fee, these others add up to more than 50 percent of revenue for large banks. In other words: They’re charging you fees to use your own money!

“Banks” have been around since about 2000 BC, as we’ve found loans (with interest) for grain on clay tablets.

My first note: student loan debt. I was forced to take out a student loan, which was my introduction to notes. I realized I paid $7,814.40 to borrow just $5,800. All the bank had to do to make that money was lend it to me.

A small tweak in decisions made about a thing like housing can dramatically change the future of one’s net worth

Pareto principle
20 percent of the agents made 80 percent of the money.

I wanted to buy something with more than one unit, that I could both live in and rent out to others.

You don’t make money on the sell; you make money on the buy

I wrote into the agreement of sale that I would split repairs up to a certain amount, which gave the seller incentive to accept my deal.

home equity lines of credit, or HELOCs

When buying personally, my wife and I always take out the maximum liability insurance protection allowed on our policies for our rentals, which insure us considerably. We also employ umbrella policies for additional liability coverage.

I’ve always been a big believer in using professional management. most have a full-time maintenance staff, eviction court experience, etc.

house rich and cash poor when she reached retirement age

When it comes to living well, especially in higher-priced properties, I think it pays to rent rather than own. If you want to live in a place like New York City, San Francisco, or most areas in the United States with oceanfront property, it definitely can be a better idea to rent.

The qualifications really boil down to three main things: credit, income, and your debt-to-income ratio.

A perfect example of an unsecured loan would be a credit card, where there is no real collateral.

If they don’t balk at your initial offer, then it’s probably too high

my goal at the time being to buy one house a year for twenty years

Home equity lines of credit aren’t the only lines of credit available to the average investor. One additional source of working capital, very similar to a HELOC, is a business line of credit.

banks often reviewing your borrower status on a yearly basis. This review usually consists of reevaluating a borrower’s financials, which can change the terms of the line or even end up in a denial of the line of credit altogether.

knowing how to do plumbing and heating is a big plus when dealing with real estate investments, since they are two of the most expensive things that can go wrong with a home.

The heart attack put him out of work for about nine months. There are quite a few lessons we can all learn from this story— having enough disability insurance in case tragedy strikes, being able to replace yourself in your own business, or even sticking to the rule of thumb of having enough reserves to cover six months’ to a year’s worth of living expenses.

today, I would almost never use a HELOC to buy another property. Most likely, I would use what is known as private money

Let’s say my plumber friend had used private or hard money instead of his HELOC. It won’t take long to explain that things would have played out much differently when his heart attack took place. First, a private or hard money lender usually doesn’t report to credit, and the loan is normally just attached to the house being lent on. So if you were to fall on hard times as my plumber did and couldn’t make payments, you would not only avoid dinging your credit but would also probably just end up transferring the property back to the lender. That’s it. No harm, no foul (although maybe don’t expect said hard or private money lender to lend to you again).

precautionary tale

So word to the wise: Have your goals in alignment and your roles, responsibilities, and compensation well defined before starting a partnership. And don’t forget to have a plan B!

whenever I found a deal, I knew all I had to do was present it to my private money list.

proved yourself, and have built trust, an individual investor is much more flexible with lending compared with a bank or even a traditional hard money lender. Just about all the terms are negotiable, and the guidelines tend to be less strict

Since the majority of these loans go toward renovations, someone with experience renovating this type of property would make the ideal borrower.

checklist of requirements

If you’re a reputable and trustworthy person, and you have a viable investment that you can explain (especially one you have a track record of working with), the money seems to find you.

if there’s a very large renovation to be done, don’t disperse all the proceeds until sections of the work are completed

Along that same line, be sure to do reinspections, as well, to confirm that all work has been completed before a particular phase is satisfactory enough for the borrower to receive the next draw of capital.

I was raising larger and larger amounts of capital, and one of the best ways I did it was by teaching people how to raise money. People like to invest with those they trust, and who better to trust than the person you learn from?

I chose to settle for the commission. I passed on all seventy-five of those deals every year because I didn’t have the right capital and team in place to buy them on my own. Looking back, if I had used hard money, I believe I could have personally acquired all those deals, and my portfolio today would be massive. I wouldn’t have been stepping over dollars to pick up dimes, as the saying goes.

I was sitting at a table with a friend who has bought and sold easily hundreds of houses. He may have the largest portfolio of SFR properties of anyone I know personally. We had started talking about how he got started in the real estate investing business (prior to becoming a multimillionaire, he worked in a warehouse with my brother-in-law) and that he had done his first thirtynine deals exclusively with hard money.

He said the biggest reason he utilized hard money for these first thirty-nine deals was all the tax-free money he made on the draw.

If there was a draw schedule for repairs, the next phase of work was estimated to be $10,000, and he and his seasoned crew got the work done for $6,000, he would be able to put $4,000 in his pocket. Tax-free, too, since this is considered part of the total hard money loan.

In my experience, and in the experience of my friends, there are two ways that most real estate investors become hard money lenders. One common way is that they have a large portfolio of single-family residences, usually with a commercial blanket on it. Over time, fair market values increase, mortgage debts decrease, and their equity builds. Then they approach their lender for a commercial line of credit. One of my colleagues started his hard money company with a $10 million line of credit against his portfolio and was able to get a great rate on the line and now uses arbitrage

His loans are often 13–18 percent, with three to six points. Worst-case scenario, if a deal doesn’t work out, he’ll take a house back to rehab in his investing area. This is almost a nonissue, since with his volume of properties, he has a rehab crew on standby.

Taking a banker to lunch is a simple yet important strategy you can employ to stay on top of these types of changes. Most investors have a mortgage broker they work with or at least know of one. And if they don’t, they probably should get to know one.

He asked the broker on the other side of the table about the type of loans his bank liked to do right now. My friend took this information and ran with it.

He would acquire these properties with private money from his investor list, fix them up with private money, and move students in, which gave him amplified cash flow—even more than traditional apartments would have. He would then refinance the newly renovated and rented properties with commercial financing and pay back his private investors with the permanent financing. Today he owns and manages approximately $18 million to $20 million in student housing that he acquired in only a three-to-fouryear period, with none of his own money! Best of all, he plans to have it all paid off in less than twelve years total.

all the forms of private capital I described in the previous chapters are just different tools in the tool belt. It’s really a matter of using the proper tool for the job at hand.

Steve’s story: Take a banker to lunch and build an empire. This may be one of the most important stories in this book. He asked what the bank wanted, they told, and he did it! Absurdly simple but genius.

I went to every DIG class available and every networking meeting that would have me, and I read constantly

I eventually formed my own group called RING (Real Estate Investors Networking Group) that started out in the Philadelphia region but, over the course of many years, grew to six different cities across five different states. As the cofounder and manager of that intimate group, I had to interview many speakers, and with all my networking group experience, I could spot a valuable educator (and the not-so-valuable ones) from a mile away. Attending all these meetings also helped me later when I became a speaker myself and someone who would have to corral a room of investors for a private money project.

I even became a part owner of a title company.

I found it advantageous to start a property management company

Robert Allen. book called Multiple Streams of Income

looking to purchase with a new pair of eyes

I finished the attic and ran heat up to the third floor, essentially turning a two-bedroom property into a four-bedroom home, making $1,150 a month (versus $650 if it were a two-bedroom) and having it appraised soon after for about $80,000. The examples go on and on. I’ve turned first-floor kitchens into bedrooms (while eliminating dining rooms), turned small six-units into very large three-units, turned large one-bedrooms into smaller two-bedrooms, made an enclosed front porch into a bedroom by adding heat and electric

Wendy Patton lease options and built a mini empire around it, in both the United States and the United Kingdom.

Investing in Real Estate with Lease Options and “Subject-To” Deals: Powerful Strategies for Getting More When You Sell, and Paying Less When You Buy, which is probably the most definitive book out there on the subject.

if the title is transferred or changes hands, the bank has the right to “call the loan” due and in full.

As someone who has done hundreds, if not thousands, of subject-to deals over the years, largely from foreclosing from the junior lien position (more on that later), I can recall only one time when a bank would not allow us to reinstate a first mortgage, thus calling the mortgage due. And this was because it knew the borrower was deceased.

So with a sizable capital gain of $120,000, I knew if I sold right away, the tax would have been around $30,000 out of pocket. By holding it a year and a day (at a minimum), the gain dropped to $15,000, since it was now considered a long-term capital gain.

These improvements can include but obviously aren’t limited to property renovation, updated landscaping/maintenance, a reduction in current vacancy rates, and rent increases

you cannot depreciate land

The addition of pet and late fees

Good things come to those who wait

Junior liens (or second mortgages, as they’re commonly referred to) can be a multitude of things, including any mortgages subordinate to the senior lien, lines of credit, or home equity loans.

What are junior liens? Second mortgages, HELOCs, lines of credit, any mortgage subordinate to the senior lien.

Borrowing against the note. The most versatile strategy of note investing involves an investor’s best friend, leverage. Since the note is generating monthly income for the investor, it can be considered a cash-flowing asset. As an asset, this note can then be used as collateral for a loan with a private money investor; this is known as a collateral assignment of note and mortgage.

Unlike property management, with fees that can run anywhere from 8–10 percent of gross rent, the flat fee paid to the servicer every month is the same whether the note payments are $300/month or $3,000/month.

When I look back at what has happened over the course of my own football game of life (ages twenty-five to sixty-five), it’s not so much that I would change these moments or how I got there; it’s really a matter of speeding things up and doing more sooner.

get educated in your niche, network with others doing it, and enlist a mentor or coach with more experience if possible.

The IRS rewards us with tax breaks for providing housing, jobs, and charity. So connect with an investor-friendly accountant sooner.

Be comfortable in your investment decision, and be willing to course- correct if everything doesn’t go right or as planned. Nothing is foolproof.

[Sneha · Rating 3 out of 5]

The title of the book is Real Estate Note Investing: Using Mortgage Notes to Passively and Massively Increase Your Income. But the book is more an autobiographical look at one investor's history with the real estate market.

I guess the idea behind writing this way is that he learned things that contributed to his being able to understand concepts that really helped further his understanding of the note market. So, you get these chapter detailing the types of investments he did before notes, how he utilized relationships or leveraged different techniques. The final couple of chapters talk about notes. They don't talk about the specifics because (as is mentioned), between the ever-changing landscape of sellers and regulations, it would be impossible to write anything with any sort of lasting relevance. It's up to you, the reader, to figure these things out on your own.

I'm not really sure who this book is written for. The tone is very conversational and the book is more an overview of tools and strategies that exist for investing in real estate as opposed to the how-to guide the title suggests. This is probably not a book for a seasoned investor, but a newbie would probably be frustrated with the lack of actual instruction.

Essentially, if you're a fan of Dave Van Horn's, you'll probably enjoy reading more about how he came to be an investor and the strategies he utilized to get to where he is today. There are definitely nuggets of wisdom to be gleaned from his mistakes.

[Darrell Negley · Rating 2 out of 5]

The author finishes the book saying it was his investor life story. That is was, but it was supposed to be a book about note investing. The note investing really doesn’t get discussed in any detail until page 139, and even then it’s lacking. This was more of the meandering journey of one investor instead of an in depth topical book.

[Adam · Rating 4 out of 5]

I surround myself with people who support my upward aim.
focus on making your next shot great
I don't want your money I want your wisdom
A story of success not of dysfunction
Mission Critical
I leverage people money and time to build wealth
Buy purposefully
Access to cash access to deals
I work exclusively with local investors
Finally reached a teachable moment
Success in life comes not from holding a good hand but in playing a poor hand well
Sometimes I'm the pigeon sometimes I'm the statue
Every problem introduces a person to himself
I'm an opportunity drivin if one is good 4 is better
My focus is forward
You've got to get up every morning with determination if you want to go to bed with satisfaction
I'm ready to charge hell with a water pistol
The wise man questions himself the fool others
What have you done uncommonly well?
Trust in advance what will only make sense in reverse
There are things in life you have to work for and there are things in life you have to wait for
What is your highest high what is your highest low
I'm continually putting quotes and ideas in my mental crock pot to let them incubate
If your not at the table your on the menu
Evaluated experience is the teacher of all things
I need time to let my thinking catch up to my feelings
If you put a small value on yourself rest assured the world will not raise the price
Who you are is who you attract
Your vision will become clear only when you look into your heart
Do you know the difference between what you want and what your good at?
You must know if the desire you have matches the ability you posses
You must know yourself to grow yourself
My biggest regret is not thinking big enough soon enough
A fast nickel beats a slow dime
Deal with the paper behind the property
Hosting an investor happy hour
How many deals could you do if you had an unlimited supply of money
Access to cash access to deals

[Andrew Katz · Rating 2 out of 5]

I rarely rate books and write reviews, but this book deserves a review.

The first 3/4 of the book is about different types of financing, so only 1/4 of the book talks about how to invest in notes, but the author doesn’t actually discuss the process of investing in notes.

How do I look at a non-performing loan to see if it is a good buy? He provided no technical examples. He discussed that he works with borrowers to get them performing again, but he didn’t say how to actually do that. I need technical examples of how I would go about this.

If you’re looking to learn about real estate note investing, this is NOT the book. I give this 2 stars because if you’re a newbie to real estate investing, it had some good information.

[JAMEN S ARMENDARIZ · Rating 5 out of 5]

Great book!

Great and surprisingly interesting read on what most people would consider a not so exciting topic. Very digestible format, concise and great personal stories and examples of how the author used some of the very strategies he writes about including the pitfalls and the benefits. Insightful information not just on note investing but about how to scale, use leverage and have money work for you, having your invested assets pay for your college all of which can be valuable in all aspects of financial independence!

[Ted Ehlert · Rating 5 out of 5]

This is a great book for the military investor, because it teaches a way to get into real estate without owning properties, managing them, etc. Given the constant movement of the military lifestyle, many potential investors shy away from real estate out of concern for "what to do after I PCS". While that shouldn't be a concern in 2024 given automation and smart phones, it can be. This book won't make you a note investor, but it will give you the basics so you can do more research and start investing.

[Dan Walker · Rating 3 out of 5]

This is a good first book for real estate investing. The title says it's for notes, but basically it's a review of the author's real estate investing career. So it helps a beginner see all the ways to make money in real estate. It's an easy read.

However I don't think you can take what's in it and go buy a note tomorrow. This is just an overview of key concepts. It's not really a step-by-step guide to buying a note. Just high-level concepts about how the business works.

[Rob Quinn · Rating 3 out of 5]

I'm a big fan of Dave Van Horn's articles on Biggerpockets but I bought this book looking for a deep dive into institutional note investing and instead got a short overview of that with a lot of backstory I already knew from the Biggerpockets blog. I got a few ideas out of it, it will be helpful and motivating for others, but it is not the technical deep dive I was looking for. That last part may say more about my level of research on the book going in rather than the book itself.

[Garrett · Rating 1 out of 5]

Title of the book is misleading. If you want great creative ways to finance real estate transactions then this is a great book. But for those like me actually interested in note investing it was a waste of time. Entire book could have been condensed into 10 pages. The information it did present about note investing was very generic.

[Ed Barton · Rating 4 out of 5]

Good Starter

Every investor is in the note game. Whether as a lender or borrower, you need to know how this works to scale your business. A good overview for the new and experienced real estate person alike.

[Joseph · Rating 4 out of 5]

Great book. It’s the investing life of Dave Van Horn. I enjoyed it and it would be particularly helpful for someone who is already in real estate and wants to transition to paper.

[Bradley Bartlett · Rating 3 out of 5]

It was kind of hard to follow. It was more if an autobiography, which I personally enjoy, but I was hoping it would have gone into more depth about real estate note investing.

[Bovard · Rating 3 out of 5]

A good introduction to note investing and an entertaining journey into one man's obsession with leverage.