A high-yield real estate note is any loan where the borrower pays a higher interest rate than traditional debt, typically 10%–14%. These include short-term hard money loans — such as fix-and-flip, bridge, and construction financing — used by professional flippers to fund projects.
You can earn 10%–14% returns by lending directly to a flipper or investing through an established hard money lender, who manages the loans and pays you principal plus ongoing interest payments.
High-yield real estate notes are a popular investment vehicle for three main reasons:
- High interest returns: Interest rates on hard money loans are currently in the 10% to 14% range, depending on the borrower’s profile. This provides investors with higher yields than stocks, bonds, rental properties, and many alternative investments.
- Strong principal protection: These notes are backed by real estate worth far more than the loan balance. For instance, if the loan is $750K and the real estate is worth $1MM, the borrower could default and the property could drop in value, yet you’d still recover your principal and interest. Equities don’t offer this protection.
- Short investment horizon: Hard money loans have a duration of just 6 to 18 months. This means you receive your principal and interest quickly after making the initial investment. Your principal investment isn’t locked up for multiple years.
In this article, we explain how to invest in high-yield real estate notes, even if you don’t have the capital to fund an entire hard money loan.
We’ll also walk through key factors to consider when investing, so you can distinguish quality notes from risky ones and minimize unnecessary exposure.
Constitution Lending is a hard money lender that has originated over $200MM in hard money loans. Thanks to the caliber of our real estate borrowers, our default rate is under 2%, and our investors have always preserved their principal. Sign up for an investment account to learn more about our high-yield note options.
Where to Find High-Yield Real Estate Note Investing Opportunities
There are three ways to start investing in high-yield real estate notes:
- Lend directly to a borrower → best for private lenders and institutional investors.
- Purchase performing mortgage notes from a bank → best for investors with strong bank relationships.
- Invest fractionally with a private lender → best for individual investors without the capital, expertise, or time for direct lending.
Lend Directly to a Borrower
Traditionally, the only way to earn 10% to 14% on hard money loans was to lend directly to borrowers. But doing so requires:
- A strong borrower network → access to real estate investors with excellent credit scores and proven histories of successful flips.
- Significant capital → most residential real estate projects need $200K to $500K to cover both the property purchase and renovations.
- Underwriting expertise → the ability to review paperwork, negotiate interest rates, collect repayments, manage escrow accounts, and handle compliance and reporting.
- Foreclosure knowledge → understanding how to recover your principal and interest payments if a borrower defaults.
Direct lending isn’t a realistic option for most investors because they aren’t private lenders and may not want to dedicate hundreds of thousands of dollars to a single loan.
Still, direct lending is an option for institutional investors and private lenders who have the funds, time, and expertise to originate loans.
Read more: How to Buy Mortgage Notes with as Little as $1,000
Purchase Notes From a Bank or Another Investor
A common alternative to direct lending is purchasing real estate notes through a financial institution, such as a bank, credit union, or an online marketplace.
This offers a key advantage over direct lending; note buyers don’t have to source, underwrite, or service loans themselves — another lender has already done that. Buyers simply purchase the loan and earn monthly income from the borrower.
However, this approach requires significant capital, often $1MM to $2MM, plus the relationships to even access these sales since they’re not open to the public.
Online marketplaces may appear more accessible, but we recommend avoiding them as they’re often filled with low-quality notes. In fact, they’re one of the main reasons we see note holders losing money.
The reason for this is that the financial incentives of most marketplaces don’t align with yours. You only want to invest in high-quality notes, but marketplaces are incentivized to list and sell as many notes as possible, regardless of their quality, since they earn commissions and listing fees. As a result, they’re loaded with troubled loans nearing default.
Invest Fractionally with a Lender
The most reliable way of finding and investing in quality high-yield notes is through a private lender. This is because:
- It’s more accessible: At Constitution Lending, for example, we’ve been originating hard money loans for almost 10 years and we allow investors to purchase shares in them, starting with just $1,000. You don’t need $200K or more to start investing.
- No steep learning curve: You don’t have to handle loan sourcing, underwriting, or servicing. Instead, you leverage the lender’s expertise and collect passive principal and interest payments each month.
Unlike note marketplaces, which are incentivized to list any and all notes, we’re invested in the notes on our platform because we originated them with our own money. This means our financial interests align with yours to ensure that the loan performs.
In fact, due to the quality of mortgage loans we originate, we have a default rate under 2% while the national average is 4% (the default rate is the percentage of loans that end up in default). For every 100 loans we originate, fewer than 2 stop paying. This gives our investors confidence that they’ll receive consistent repayments until the end of the term.
We also offer a payment guarantee on all notes, providing an additional layer of protection. If you invest in a note and the borrower stops paying, we’ll cover up to 6 months of payments out of our own pocket while foreclosing and returning your principal plus any owed interest.
Read more: How Investors Can Profit from Non-Performing Notes & What to Consider When Investing
How to Invest in Quality High-Yield Real Estate Notes: 5 Factors to Consider
What Is the Loan-to-Value (LTV) Ratio?
Loan-to-value (LTV) is one of the most important metrics to evaluate during due diligence, as it represents how secure a loan is.
LTV measures the loan size relative to the underlying property’s value. You can calculate LTV by dividing the loan amount by the property’s value and multiplying the result by 100.
For example, a loan with a $750K balance secured by a $1MM investment property would have an LTV of 75%.
All else being equal, the lower the LTV, the safer the loan because you’re lending less money compared to the physical property’s value. If the borrower stops paying, note investors can liquidate the property, and since it’s worth more than the amount owed, easily recover their entire principal investment and owed interest payments.
A lower LTV also protects against real estate market volatility. Using the above example, the property’s value can drop from $1MM to $750K, and investors can still sell the property and recover their principal and interest. The borrower’s equity absorbs the loss.
For this reason, we recommend investing in real estate notes with an LTV of 75% or less. Of course, the lower the ratio, the safer your principal.
At Constitution Lending, all our loans have an LTV under 75%, with many as low as 30%.
What Is the Borrower’s Credit Score and Real Estate Investing Experience?
Another factor that indicates the safety of a real estate note is the borrower’s creditworthiness. It shows how likely they are to continue paying until the end of the term. Borrowers who have previously qualified for and repaid multiple hard money loans are more likely to make consistent monthly payments than someone with a history of delinquency.
We also advise assessing the success rate of the borrower’s previous rehab projects, as it reflects their ability to successfully manage renovations.
To minimize default and execution risk, choose real estate notes where the borrower has a minimum credit score of 660 and multiple successful fix-and-flip projects under their belt.
At Constitution Lending, all of our borrowers have credit scores of at least 660, with many scoring 700 or higher. They’ve also been active real estate flippers for years, giving you confidence in their ability to manage projects successfully.
What Is the Loan’s Interest Rate and APR?
The interest and fees a borrower pays on a loan determine your returns. The highest-yielding hard money notes typically carry an interest rate between 10% and 14%. The APR (annual percentage rate) reflects both the interest rate and any fees, giving you a more complete picture of your returns.
It’s also essential to review the loan’s payment structure — essentially, how often the borrower is required to make principal and interest payments. This dictates your cash flow frequency.
For example, at Constitution Lending, our borrowers make monthly interest payments, which ensures our investors receive regular passive income. At the end of the loan term, the borrower sells the property and repays the principal balance.
Although this is the most common payment structure, high-yield hard money notes can feature a variety of cash flow schedules. For instance, some promissory notes ask borrowers to make both monthly principal and interest payments, while others accept a lump sum payment at the end of the term.
What Is Your Position in the Capital Stack?
Your position in the capital stack plays a crucial role in determining the safety of the note.
The capital stack refers to the order in which creditors are paid once the underlying real estate is sold and the sale proceeds are used to settle debts. First-lien investors (those holding the primary loan on the property) are paid first and in full. Second-lien mortgage loans are paid next, and any remaining funds go to the property owner.
Passive investors should focus primarily on first-lien notes, as these are the safest and offer the most principal protection. As a first-lien investor, you receive payment first and in full before other investors on the property.
At Constitution Lending, all our real estate notes are secured by a first-lien position.
How Long Is the Loan Term?
The final factor to consider when choosing a high-yield real estate note is its duration, since this dictates how long you’ll wait before receiving your principal investment.
Most high-yield hard money loans have short terms, typically six to 12 months, and rarely longer than 18 months. This means you’ll recover your principal relatively quickly, giving you the flexibility to reinvest in additional real estate notes, explore other asset classes, or simply withdraw the funds for other purposes. Unlike long-term promissory notes, you’re not locked in with expensive early withdrawal penalties.
How to Invest in High-yield Real Estate Notes That Constitution Lending Originates
Here’s how you can invest in CL high-yield real estate notes in under five minutes:
- Open a free investment account by providing your full name and email address. You’ll then be taken to a homepage where you can view all the types of notes we’ve originated.
- Feel free to browse through our available real estate notes and do your due diligence by viewing the loan’s LTV, interest rate, duration, risk rating, and the terms of the note.
- You can learn more about a specific note by clicking on it and viewing all associated information, including the borrower’s credit score, the type of property (whether its residential or commercial real estate), liquidity, the real estate’s appraised value, the note position, and the as-is and after-repair LTV.
- To invest in a promissory note, select the “Fund This Loan” icon in the bottom right-hand corner, and you’ll be asked to link a bank account or IRA. Once that’s complete, enter the amount you’d like to invest.
- You receive interest payments from the borrower on the first of every month, and your entire principal investment is returned at the end of the term. You can also view your note investment portfolio on the Constitution dashboard.
High-yield Mortgage Note Investing with Constitution Lending
Open a free investment account to explore and learn more about our mortgage note investing options.
