Guide to Investing in Performing and Non-Performing Real Estate Notes

The Smarter Way to Invest in Real Estate


Why We’re Qualified to Guide You on Real Estate Note Investing

At Constitution Lending, we don’t just talk about real estate note investing—we do it all day every day.

As a vertically integrated lender and note investing fund, we specialize in originating and managing real estate notes, giving us a unique perspective on this dynamic asset class.

Whether it’s performing or non-performing notes, we have firsthand experience navigating the complexities, opportunities, and strategies that make this a compelling investment choice for accredited investors.

Introduction

Real estate has long been considered a cornerstone of wealth-building, but traditional methods—like owning rental properties or flipping houses—come with significant challenges. Managing tenants, dealing with maintenance and renovations, and always being a moment away from a large unforeseen expense can be exhausting and time-consuming.

For accredited investors seeking a more strategic approach, real estate notes provide an opportunity to reap the benefits of real estate without the operational headaches. Whether through steady cash flow from performing notes or high-reward opportunities from non-performing notes, this asset class offers flexibility, stability, and the potential for substantial returns.

This guide explains the fundamentals of real estate note investing, highlights its advantages over traditional real estate investments, and we have broken down real estate note investing into two main categories: performing and non-performing notes.

What Are Real Estate Notes?

Real estate notes are loans secured by real property. When a borrower takes out a mortgage or other real estate loan, the terms are documented in a promissory note. This note specifies the loan amount, interest rate, repayment schedule, and other terms.

When a lender or an investor purchases this note, they acquire the right to receive the borrower’s payments. If the borrower defaults, the lender has a legal claim to the underlying property, which serves as collateral.

Types of Real Estate Notes

  • Performing Notes: The borrower is current on payments and adhering to the terms of the loan. These notes provide predictable, consistent cash flow.
  • Non-Performing Notes: The borrower has defaulted or fallen behind on payments. These notes are riskier but often purchased at significant discounts, creating opportunities for higher returns.

Why Invest in Real Estate Notes?

Real estate notes are a powerful investment option that can combine the returns of real estate with the income and capital protection of debt investing. For accredited investors seeking diversification, strong risk-adjusted returns, and unique opportunities, real estate notes offer several compelling benefits:

1. Asset-Backed Security

Real estate notes are secured by the underlying property, which acts as collateral. This provides a level of protection that many other investments lack:

  • If the borrower defaults, the noteholder has legal rights to the property, which can be foreclosed upon or sold to recover the investment.
  • Unlike unsecured investments such as stocks or bonds, the tangible asset backing a real estate note reduces the risk of total loss.

This intrinsic security makes real estate notes an attractive option for investors focused on preserving capital while earning returns.

2. Income with High Risk-Adjusted Returns

Performing notes deliver regular interest payments from borrowers. These payments can create steady cash flows without the variability of other investments like stocks or rental properties.

For investors seeking consistent, hands-off income, performing notes are ideal.

3. High Upside Potential

Non-performing notes, while riskier, present opportunities for outsized returns:

  • These notes are often purchased at a discount relative to their outstanding balance, allowing investors to capture value through borrower reinstatement, loan modification, or foreclosure.
  • Successful resolutions of non-performing notes can lead to significant profits, either through borrower payoff or the eventual sale of the underlying property.

This dual potential for income and high reward gives investors the flexibility to pursue strategies that align with their risk tolerance and financial goals.

4. Diversification in a Real Estate Portfolio

Investing in notes provides exposure to real estate while diversifying away from traditional ownership models:

  • Notes allow investors to benefit from the stability of real estate without being directly tied to market fluctuations affecting property values or rental income.
  • By incorporating both performing and non-performing notes into a portfolio, investors can balance steady cash flow with higher-return opportunities, creating a diversified income stream.

5. Lower Operational Involvement

Compared to owning physical property, real estate notes significantly reduce the time and effort required to manage an investment:

  • As a noteholder, you are not responsible for property maintenance, tenant relations, or other day-to-day operations.
  • Your role is to monitor payments and execute recovery strategies if a borrower defaults.

This low-maintenance nature makes real estate notes particularly appealing to busy investors or those seeking a more passive investment approach.

6. Access to a Range of Investment Strategies

Real estate notes cater to different types of investors by offering flexible strategies:

  • Performing Notes: Provide predictable, low-risk income for those seeking steady cash flow.
  • Non-Performing Notes: Offer higher-return opportunities for investors willing to take on more risk and actively manage their investments.

This adaptability allows investors to build a portfolio tailored to their preferences, whether they prioritize income, growth, or a combination of both.

How Are Real Estate Notes Better Than Investing in Real Estate?

While direct property ownership remains a popular investment strategy, real estate notes provide several advantages:

1. You’re in a Better Position Than the Property Owner

When you invest in real estate notes, you’re stepping into the lender’s shoes. This gives you a significant advantage because your investment is secured by the property, but you’re not taking on the same risks as the owner.

  • The borrower has equity in the property, and that equity serves as your buffer. They’ll lose their equity first in a default situation before you risk losing anything.
  • If the borrower defaults, you have the legal right to pursue repayment through foreclosure or other strategies, backed by the value of the property itself.

This positioning makes note investing inherently safer compared to direct ownership, where your equity is the first to be at risk if the market dips or the property underperforms.

2. No Operational Headaches

Let’s face it: owning property comes with a lot of stress. From tenant issues to unexpected repairs, property management can quickly become a full-time job. With notes, you sidestep all of that:

  • You’re not responsible for property maintenance, utilities, or tenant calls at midnight.
  • Your role as a note investor is to collect payments or enforce your rights as the lender if the borrower defaults.

This hands-off nature allows you to focus on scaling your investments rather than managing the day-to-day issues that come with real estate ownership.

3. Easier to Get Started

Real estate notes offer a simpler way to invest in real estate without the complexities of buying, owning, or managing a property:

  • Streamlined Investment Process: Platforms like Constitution Lending provide curated investment opportunities, making it easy to get started even if you’re new to notes.
  • Lower Capital Requirements: Investing in notes typically requires less capital than buying a property outright, allowing you to gain exposure to real estate without tying up as much cash.

Types of Real Estate Notes

Performing Notes

    Performing notes are loans where borrowers consistently make payments. These are ideal for investors seeking predictable income with minimal involvement.

    Why Invest in Performing Notes?

    • Steady Cash Flow: Monthly payments deliver reliable passive income.
    • Low Risk: Borrowers are fulfilling their obligations, reducing uncertainty.
    • Short-Term Liquidity: Many performing notes pay off within 1–2 years, offering quick access to funds for reinvestment.

    Example Transaction

    Let’s say you purchase a performing note for $180,000 backed by a property worth $270,000. The note has an interest rate of 12%, providing $1,800 in monthly income. Over two years, you earn $43,200 in interest while the borrower pays off the loan, and your principal is returned in full at maturity.

    Non-Performing Notes

    Non-performing notes involve loans where borrowers are delinquent or have defaulted. These notes are riskier but offer higher returns through strategic recovery methods.

    Why Invest in Non-Performing Notes?

    • Discounted Purchase Price: These notes are often sold for significantly less than the outstanding balance, creating opportunities for high returns.
    • Default Interest or Borrower Payoff: If the borrower reinstates the loan, investors can earn high interest rates and recover the loan amount.
    • Multiple Exit Strategies:
      • Foreclosure Sale: Sell the property to recover funds.
      • Property Acquisition: Take ownership of the property at a discount and resell or redevelop it.

    Example Transaction

    In April 2024 the Constitution Real Estate Credit Fund purchased a non-performing note on an industrial building with unpaid principal of $500,000. The property was valued at $1,200,000. The  fund was able to negotiate a purchase price of $300,000 and within 4 months of purchase the borrower had paid off the loan in full. Earning the fund a $200,000 return on a $300,000 investment.

    What’s the Risk of Investing in Real Estate Notes?

    The primary risk of investing in real estate notes is that if the property value falls below the loan amount, investors may have difficulty selling the property for more than what’s owed.

    However, you can greatly reduce this risk by investing exclusively in low LTV loans, ideally below 70%.

    LTV stands for loan-to-value, a ratio calculated by dividing the loan amount by the property’s value. For instance, if a property is worth $400,000 and the borrower uses a $280,000 loan to purchase it, the LTV is 70%.

    This 70% protects investors if the property loses value. For example, if the property drops in value by up to 30% within the 6-to-18-month loan term and the borrower defaults, investors can still recover their investment by selling the property for 70% of the original value, which is the loan amount.

    That said, a 30% loss in property value is extremely rare, as real estate markets typically experience annual fluctuations of only a few percent.

    Why Invest with Constitution Lending?

    When it comes to real estate note investing, choosing the right partner can make all the difference. At Constitution Lending, we bring unmatched expertise, transparency, and alignment to ensure that your investments in performing and non-performing notes are both strategic and successful. Here’s why accredited investors trust us with their capital:

    1. Expertise in Real Estate Notes

    We’re not just facilitators; we’re specialists in every aspect of real estate note investing.

    • Deep Market Knowledge: From loan origination to managing non-performing notes, we’ve built years of experience navigating the intricacies of this asset class.
    • Proven Processes: Our team has managed hundreds of notes, mastering the complexities of foreclosure processes, borrower negotiations, and property valuations.

    This expertise ensures that every note we offer has been rigorously vetted and structured to deliver maximum value.

    2. Vertically Integrated Operations

    Our vertically integrated model sets us apart. We don’t rely on third parties to manage critical aspects of your investment. Instead, we handle everything in-house, including:

    • Loan origination and underwriting.
    • Borrower negotiations and loan resolutions.
    • Foreclosure processes and asset management.

    This hands-on approach ensures efficiency, accountability, and better outcomes for investors.

    3. Co-Investment Model: Aligned Interests

    We believe in putting our money where our mouth is. At Constitution Lending, we invest alongside you in every note we offer. This means:

    • Our success is directly tied to yours—we have skin in the game.
    • You gain confidence knowing we’re as committed to the performance of each note as you are.

    This alignment of interests creates a true partnership, where we’re equally invested in achieving the best results.

    Conclusion

    Investing in real estate notes is an incredibly powerful way to build wealth. Whether you prefer the steady income of performing notes or the high-reward opportunities of non-performing notes, this asset class offers a smarter, higher risk-adjusted way to invest in real estate.

    Ready to explore real estate note investing? Visit Constitution Lending today and learn more about how we approach note investing.

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    Picture of Gina Jensen

    Gina Jensen

    Gina Jensen works as a freelance financial consultant. When she isn't immersed in work, she's either tending to her kids or blogging. Her favorite thing is hot cup of coffee on a sunny day.
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