Investing in real estate can be lucrative when done right. It doesn’t only serve as an additional income stream but also helps diversify one’s existing portfolio.
The problem is that most newbie investors don’t know how to do real estate investing. Others know how to do it but aren’t sure which method suits them best.
Two of the best ways of making money in real estate are buying mortgage notes and investing in REITs (Real Estate Investment Trusts). Please read below to learn more about them.
Mortgage Notes: What are They and How to Invest in Them?
Most people get a loan when buying a house, some may even apply for down payment assistance. They make monthly payments on the principal amount, including the interest. That’s what you call a real estate or mortgage note. But did you know that these notes actually get traded actively behind the scenes? Many folks don’t realize that. However, if a lender ever sent a letter to you instructing you to address your monthly repayment elsewhere, then chances are another company has bought your mortgage.
Note that the new owner of the loan can choose to foreclose the real estate when not paid. That’s because a mortgage note is secured by the property. All the rights associated with it go to the buyer too.
Simply saying, purchasing an existing mortgage is how you invest in real estate notes. The buyer becomes the new lender after closing the deal. Anyone who purchases real estate notes will have all the previous lender’s rights. That means you can take the collateral that the borrower refuses to pay or commit mortgage mistakes even if you don’t own the property.
What Are REITs And How One Can Become an Investor?
Investing in real estate investment trusts increases your leverage, especially if mortgage notes are also part of your portfolio.
Real estate investment trusts are companies that buy mortgages using money they borrow from other sources. They borrow at short-term rates but buy long-term investments. Such a strategy can be profitable when done correctly. How can you become a REIT investor? Well, you only have to purchase shares.
Buying mortgage REITs is pretty straightforward because most of them get traded publicly on stock exchanges. You can purchase shares through an investment company or a stockbroker. It’s essential to take note, though, that they carry real interest-rate risk. That’s because the difference between what they lend and what they pay to borrow is what decides how much money they pass through to investors.
Types Of Real Estate Notes
Performing and non-performing notes are the two broad categories of mortgage notes one can invest in. Below is a closer look at these categories.
- Performing Notes – The primary focus of these notes’ investors is on current income. That’s because the borrower makes his/her scheduled payments in this type of real estate note.
- Non-performing Notes – On the other hand, this mortgage note type is where the borrowers don’t make their scheduled payments. With that said, banks and other financial institutions generally sell these at significantly deep discounts. Some lenders even offer 50-90% off. The investor’s goal is to either foreclose on the real estate if needed, talk to the homeowner to reach a lump-sum settlement, or modify the loan with the borrower. Non-performing real estate notes often carry more risk, but returns can be higher.
Different Kinds of Real Estate Investment Trusts
The broad real estate sector covers REITs under the revised GICS or Global Industry Classification Standards. Two industries comprise real estate investment trusts: Equity REITs and Real Estate Management and Development.
Take a more detailed look at each of the two kinds of REITs below.
- Equity Real Estate Investment Trusts – A more diversified investment portfolio is the primary benefit of equity REIT investment. There are also excellent tax savings opportunities in some cases. For instance, there’s no tax at the corporate level if a real estate investment trust distributes dividends comprising at least 90% of its taxable income.
- Real Estate Management and Development Companies – Real estate management and development is REIT’s second classification. This category offers several benefits to investors. For instance, real estate management and development companies tend to produce significant dividend payouts, which is perfect for beginners. Direct exposure to developers is also awaiting investors. They’re also the first ones to take advantage of future opportunities in many cases.
Which Is the Better Way to Invest in Real Estate?
The better real estate investment is the one that best serves the investor. You have to consider many factors: Do you want to deal with property issues yourself? How much capital do you have? How about the time you’re willing to invest? Rather than mortgage notes, go for REITs if you don’t have an interest in handling everything yourself.
You should know what is mortgage notes and REIT as well as their difference and benefit. Through this, you’ll be able to find which better suits you when you start your investment in the real estate business.