Performing notes are real estate-secured loans where the borrower makes timely monthly payments.
When you invest in performing notes, you lend to borrowers with strong payment histories and credit scores, or invest through a private lender who does. In return, you earn principal and interest payments from the borrower.
Performing notes can be contrasted with non-performing notes, in which investors purchase them at a discount to the payoff, foreclose to take control of the underlying property, and sell it at a profit.
There are three main benefits to investing in high-quality performing notes:
- High annual returns: Interest rates on hard money notes are between 10% and 14%. So, if you invest in hard money notes where the borrower makes timely payments, you can earn passive income with returns significantly higher than stocks, bonds, and traditional real estate investing.
- Strong principal protection: The best notes are secured by real estate valued well above the borrower’s outstanding debt. This means that if the borrower doesn’t pay, note holders can liquidate the real estate and use the proceeds to recover their principal investment and owed interest payments.
- Short investment horizon: Hard money loans have 6 to 18-month terms, so note investors get their principal back shortly after making their investment. With longer-term loans, note holders are locked in for years.
In this guide, we review how you can start investing in performing notes without having to originate them yourself. We also cover vetting strategies to ensure you only invest in high-quality notes with strong principal protection.
At the end, we show how you can purchase shares in the performing loans we originate at Constitution Lending.
Constitution Lending has originated over $200 million in hard money loans since 2018, and we offer investors fractional ownership in these loans starting at just $1,000. Due to the quality of borrowers we lend to, we have maintained a track record of zero principal losses for our investors. Open a free investment account here.
Where to Find Performing Notes and How to Start Investing
Until recently, the only route into performing note investing was to originate loans yourself.
That meant coming up with a few hundred thousand dollars in capital, finding creditworthy borrowers, and having the know-how to underwrite financial documents, service loans, and even foreclose on properties. Most individual investors don’t have the capital or expertise for direct lending.
As a result, many investors have started partnering with established private lenders, purchasing shares in performing notes that these lenders have already originated. This is known as fractional investing, and it offers three key advantages over direct lending:
- You can invest with less capital. When you invest fractionally with a lender, you don’t need to fund an entire loan. Private lenders like Constitution Lending enable investors to start with as little as $1,000.
- You don’t need to learn about loan sourcing, underwriting, or servicing. Instead, you leverage our experience as a private lender.
- You can access payment protections, such as our payment guarantee feature, which allows you to receive up to six months of payments paid directly from our own funds if borrowers fail to make payments. (More on this later.)
Read more: How to Buy Mortgage Notes with as Little as $1,000
8 Key Due Diligence Factors to Evaluate Before Investing in a Performing Note
Below, we’ve compiled a checklist of eight due diligence factors to consider when evaluating a performing note, so you can make more informed decisions.
We recommend investing only in notes that meet all eight considerations. This will help you separate safe performing notes from those that are likely to default.
1. What Is the Note’s LTV Ratio?
The pivotal factor in a note’s quality and safety is its LTV ratio.
LTV is short for loan-to-value, and it measures the unpaid loan amount against the underlying real estate’s value. For instance, a promissory note with a $750K unpaid balance secured by a $1MM multifamily home would have an LTV of 75%.
The lower a note’s LTV, the safer it is because there’s more borrower equity to protect investors’ principal from default risk. In the scenario above, the borrower can stop paying, the property’s value can fall from $1MM to $750K due to market conditions, and investors can recover their full $750K principal investment through liquidation.
We recommend focusing on notes with an LTV of 75% or less. This provides a healthy 25% borrower equity cushion to protect your principal investment.
Our loans at Constitution Lending have LTVs under 75%. Due to this strong principal protection, investors have consistently preserved their principal with no losses.
2. Is the Promissory Note Secured by a First or Second Lien?
Another critical factor in a note’s quality is its repayment priority, in other words, who gets paid first after the underlying property is liquidated.
With most notes, first-lien investors (those in the primary mortgage) are repaid first. Any remaining sale proceeds go to investors in subordinate debt, with the borrower collecting whatever is left over.
For maximum capital protection, we recommend focusing your investments on first-lien real estate notes, as they pay you in full before any other note investors on the property.
At Constitution Lending, we originate loans secured by a first-lien position, giving our investors priority repayment.
Read more: How to Invest in First Trust Deeds: Benefits & Risks Explained
3. What Is the Borrower’s Credit Score?
A borrower’s credit score is a reliable indicator of how likely they are to repay until the end of the term.
We recommend investing in real estate notes backed by borrowers with strong credit scores and a proven history of on-time repayment. This maximizes the likelihood that the note will continue performing.
For short-term loans, such as those used to renovate fix-and-flip properties, it’s also wise to review the borrower’s track record. Consistent success in past projects demonstrates expertise and lowers the risk of default.
That said, while a credit score is a good indicator of a borrower’s payment habits, the best private lenders offer income stream insurance that pays investors even if borrowers don’t pay.
At Constitution Lending, we’re confident in the quality of our borrowers. That’s why we’ll pay you up to six months of payments if the borrower defaults. During that time, we conduct the foreclosure process, liquidate the collateral, and return you with your owed principal and interest payments.
4. How Long Is the Loan’s Term?
Loan duration is a crucial factor, as it determines how long your capital is tied up before you receive your principal back.
Longer-term performing notes can lock investors in for years, limiting flexibility and making it difficult to respond to market changes.
That’s why we advocate for hard money loans. Their short terms — typically 6 to 18 months — mean investors can access principal quickly, maintain flexibility, and easily diversify into other investments or withdraw funds for personal reasons.
At Constitution Lending, all our mortgage note investment opportunities have terms ranging from 6 to 18 months.
5. What Is the Interest Rate and Repayment Structure of the Note?
To understand the returns you can expect from a performing note, consider the interest rate and borrower fees.
Our borrowers pay interest rates ranging from 10% to 14% on their hard money loans, providing investors with attractive returns.
You should also review the loan’s repayment schedule before making an investment. Borrowers typically make monthly interest payments and repay the full principal amount at the end of the term when they sell the investment property.
Alternatively, some loans may distribute interest quarterly, while others require borrowers to pay both principal and interest in a lump sum at the end of the term.
With Constitution Lending, our borrowers make monthly interest payments, so our investors receive consistent cash flow. At the end of the loan term, the borrower sells the underlying property and settles the principal balance.
6. Does the Lender Offer Protections in Case the Borrower Doesn’t Pay?
Even with a borrower who has excellent credit and a proven repayment history, it’s wise to have safeguards in place in case they stop making payments.
That’s why all our loans come with a payment guarantee. If a borrower stops paying, we cover your payments for up to six months or until the borrower resumes payment, whichever comes first. To our knowledge, we’re the only lender that offers this level of protection.
7. Does the Lender Invest with You?
Most note investment platforms and marketplaces don't invest in the note opportunities they advertise. They simply connect note buyers and sellers to earn listing fees and commissions.
Since they’re incentivized to list as many notes as possible with little to no quality checks, these platforms are flooded with low-quality notes on the verge of default.
At Constitution Lending, we take the opposite approach. Every real estate note on our platform is originated with our own capital. That gives us real skin in the game and keeps our financial interests aligned with yours to ensure the loan performs.
Read more: 7 Best Investment Platforms for Fractional Real Estate: A Detailed Review
8. What Is the Lender’s Default Rate?
We recommend asking a lender about their default rate before investing with them.
The default rate is the percentage of loans that end up in default, making it a strong indicator of a lender’s loan quality.
The nationwide default rate on real estate loans is about 4%, so high-quality private lenders should come in lower than that.
At Constitution Lending, our default rate is under 2%. So, for every 100 loans we originate, fewer than 2 end up defaulting. This demonstrates the quality of our real estate investors.
How to Start Investing in Constitution Lending Performing Real Estate Notes in 5 Steps
With Constitution real estate notes, investors can earn higher returns than conventional real estate investing and without the hassle of rental property management. Here’s how you can start investing:
- Open an investment account with Constitution Lending.
- You’ll be taken to a dashboard that looks like the image below. Here, you can see the performing loans that we’ve originated, alongside information such as LTV, purchase price, exit strategy, yield or return on investment, term, and risk rating.
- If you’d like to learn more about a certain note, select it, and you’ll find more detailed information such as the outstanding loan balance, as-is LTV, after-repair LTV, borrower credit score, and a deal summary.
- You can invest in a loan by connecting a bank account or retirement account to your Constitution Lending wallet. Then, simply select the “Fund This Loan” icon in the bottom-right corner and enter the amount you’d like to invest.
- You’ll receive borrower interest payments on the first of each month and your full principal investment at the end of the loan term.
Start Investing in High-Quality Performing Notes with Constitution Lending
Get started with a free investment account and explore our mortgage note investment opportunities.
