What is a Performing Note?
A performing note is a mortgage note or promissory note where the borrower is making payments on time and in accordance with the loan terms. In note investing, "performing" means the borrower has not defaulted -- they are current on their monthly payments. Performing notes are bought and sold by investors seeking predictable, passive income backed by real estate collateral.
When you buy a performing note, you are not buying a property. You are buying the right to receive the borrower's monthly payments (principal plus interest) for the remaining life of the loan. The property serves as collateral -- if the borrower stops paying, you can foreclose to recover your investment, which is why note investing is considered a real-estate-backed investment even though you never take title.
How performing note investing works
The note investing market exists because original lenders (banks, mortgage companies, private lenders, and seller-financed note holders) sometimes want to sell their loans rather than wait for the full repayment term. They sell at a discount to their unpaid principal balance. The discount is what creates the investor's yield.
For example, a note with an unpaid balance of $80,000, a 7% interest rate, and 20 years remaining might sell for $65,000. The buyer (you) pays $65,000 and collects $620/month for 20 years. Your actual yield on the $65,000 investment is significantly higher than the note's stated 7% rate because you bought at a discount.
Pricing and yields
Performing notes typically trade at 70-95% of their unpaid principal balance (UPB), depending on several factors: the interest rate on the note, the borrower's payment history, the property's value relative to the loan balance (loan-to-value ratio), the remaining term, and the property type and location. Notes with strong borrowers, low LTVs, and above-market interest rates command the highest prices.
Investor yields on performing notes typically range from 8-15%, depending on the purchase discount and note characteristics. This compares favorably to other passive real estate investments, with the added benefit that you have no property management responsibilities -- no tenants, no repairs, no midnight phone calls.
Due diligence
Before purchasing a performing note, thorough due diligence is essential. Key items include verifying the borrower's payment history (minimum 6-12 months of consistent payments), obtaining a current property valuation or BPO to confirm adequate collateral, reviewing the note and mortgage/deed of trust documents for completeness and enforceability, checking for senior liens or tax delinquencies, and confirming hazard insurance is in force.
The most common risk with performing notes is that they become non-performing notes. A borrower who has paid on time for years can stop paying due to job loss, divorce, health issues, or other life events. This is why the collateral (property value relative to loan balance) matters -- it is your downside protection.
Where to find performing notes
Performing notes are sourced from several channels: note brokers, online note marketplaces (like Paperstac, NotesDirect, and LoanMLS), direct from banks and credit unions selling their portfolio loans, from seller-financed note holders who want to cash out, and at note investing conferences and networking events.
Seller-financed notes are particularly attractive for individual investors. When a property seller finances the buyer directly, they hold a note. Many of these sellers eventually want a lump sum rather than monthly payments, creating buying opportunities at reasonable discounts.