Real Estate Notes: Are These The Holy Grail Of Passive Income In Today's Real Estate Market?

The real estate market has been one of the best-performing alternative investment sectors, as housing prices soared to record highs last year amid surging demand and limited supply. In December, the median price of a home sold reached $382,600, marking a 4.4% rise from the same month in 2022. This marks the sixth consecutive month of year-over-year price increases. Median home prices set a new record at $389,800 in 2023.

Given this backdrop, the real estate market is considered one of the best investment options. Real estate investment has long been heralded as a potent avenue for generating passive income, offering investors the opportunity to build wealth while minimizing active involvement. 

What Are Real Estate Notes?

Real estate notes, also known as mortgage notes or promissory notes, represent the debt that is owed on a property. The mortgage note is a tradable asset, allowing the original lender to sell it to another party and transfer the right to collect payments.

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A real estate note is a legal document that outlines the terms and conditions of a loan used to purchase real estate. This financial instrument is a binding agreement between the borrower and the lender, detailing the amount borrowed, interest rate, repayment schedule and other relevant terms. Real estate notes provide a structured framework for the repayment of funds and establish the rights and responsibilities of both parties involved in the transaction.

One of the key benefits of real estate notes is the potential for passive income. Investors who hold real estate notes can enjoy a consistent cash flow without the day-to-day responsibilities of property management. Additionally, the fixed and predictable nature of payments outlined in the note provides a level of financial stability, making it an appealing option for those seeking a more secure investment avenue. 

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How To Invest In Real Estate Notes 

Real estate notes can be purchased from banks and other financial institutions as well as crowdfunding platforms. While traditional mortgage notes sold by banking institutions have been popular among investors, crowdfunding platforms have been steadily gaining momentum as they offer relatively higher returns.

Connect Invest is a popular crowdfunding platform that specializes in short-term real estate notes spanning from six to 24 months. Connect Invest's average yields range from 7.5% to 9% and have a minimum investment requirement of $500. Connect Invest's default rate stands at 1.93% for over 1,200 funded loans, significantly lower than the default rate of 5.2% on U.S. commercial real estate loans.

Real Estate Notes Vs. REITs: Which Are Better? 

Unlike real estate notes, which are primarily a debt instrument, real estate investment trusts (REIT) investments involve the purchase of equity shares of publicly traded companies. REITs own, operate or finance income-generating real estate across various sectors. 

Investors in REITs receive dividends based on the income generated by the underlying real estate properties, offering a way to participate in real estate markets without the need for direct property ownership. Real estate notes pay out interest payments on mortgage loans. 

For instance, Arbor Realty Trust Inc. ABR, one of the largest real estate investment trusts in the U.S., pays $1.72 in dividends annually, yielding 12.93% on the current share price. 

While real estate notes involve investing in mortgages or deeds of trust offering a fixed return, REITs are investment vehicles that pool funds to invest in various real estate properties. REITs typically bear higher risk compared to real estate notes, but they offer higher returns. 

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