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How to Become the Bank with Note Investing (Instead of Owning Rentals)
We talk constantly about getting away from Wall Street investing and moving toward more mainstream investing like real estate. But what if you could take it one step further?
What if instead of owning the property… you became the bank?
In this episode of the Money Ripples Podcast, I sat down with bestselling author and note investing expert Fred Moskowitz to break down how everyday investors can step into the lender position receiving monthly payments secured by real estate without dealing with tenants, toilets, or trash.
If you’re burned out on rentals or just looking for smarter passive income strategies, this might be the shift you’ve been looking for.
What Is Note Investing?
At its core, note investing means buying the mortgage note (the loan) instead of buying the property.
When someone takes out a mortgage to buy a house, they sign a promissory note agreeing to repay the loan with interest. That note is backed by the property as collateral.
Most people assume banks hold onto those loans forever.
They don’t.
Banks frequently sell loans on the secondary mortgage market. Institutions like Fannie Mae and Freddie Mac buy large pools of loans. Hedge funds and mortgage funds buy them. Over time, those pools get broken down and sold in smaller pieces.
That’s where investors like you can step in.
When you buy a mortgage note, you assume the position of the lender. That means:
- You receive the monthly payments.
- You earn the interest.
- You hold the lien against the property.
- You get paid first if the property is sold.
You’re no longer the borrower. You’re the bank.
Why Do Banks Sell Loans?
This is one of the biggest questions people ask.
If loans are profitable, why sell them?
The answer is liquidity.
Banks make money by originating loans collecting origination fees, closing costs, and interest payments early in the loan’s life (which are heavily front-loaded toward interest). Then they sell the loan to recapitalize so they can originate more loans.
It’s a high-volume business built on velocity of money. And that creates opportunity.
When loans are sold on the secondary market, they are often sold at a discount. That discount is what allows investors to increase their yield.
How Buying Notes at a Discount Increases Returns
Let’s say there’s a $100,000 mortgage balance on a property.
If I buy that note for $88,000 but continue receiving payments based on the full $100,000 balance, my yield increases because I purchased at a discount.
Over time, I receive principal and interest payments based on the original loan terms — not my discounted purchase price.
This is how note investors can generate strong returns while being secured by real estate collateral.
Why Note Investing Can Be Safer Than Rental Properties
I used to think ownership was everything. Control the property. Build equity. Capture appreciation. But here’s what changed my perspective:
In any transaction, the lender gets paid first.
When a property sells, refinances, or even goes into foreclosure, the lien holders are paid before the equity owner sees anything.
If you own a rental:
- You’re responsible for maintenance.
- You handle tenant issues.
- You absorb repair costs.
- You carry vacancy risk.
If you own the note:
- The borrower maintains the property.
- The borrower pays taxes and insurance.
- You collect payments.
- You’re in first lien position.
When my own basement flooded and repairs cost over $100,000, I didn’t call the bank. I still made my mortgage payment.
That’s the power of being the lender.
Active vs. Passive Note Investing
There are two ways to approach this asset class:
1. Active Note Investing
You source notes, perform due diligence, buy them directly, and manage your portfolio (using professional loan servicers).
2. Passive Note Investing
You invest in a professionally managed note fund where the managers handle sourcing, underwriting, servicing, and portfolio management.
There’s no right answer. It depends on your time, experience, and desire to be hands-on.
For busy professionals and business owners, passive note funds can be an attractive way to gain exposure without operational involvement.
Liquidity and Flexibility
Another advantage of mortgage notes is liquidity.
Selling a property can take months. Selling a note can take days or weeks, depending on market conditions.
Plus, every dollar invested in the note is earning a return. Compare that to owning a property with significant equity sitting idle.
Idle equity earns zero. A properly structured note earns every month.
Can You Use Retirement Funds?
Yes.
One of the powerful strategies Fred covers in his book is using self-directed IRAs or 401(k)s to invest in notes.
Many investors don’t realize that retirement accounts can be deployed into real estate-backed debt instruments instead of traditional Wall Street investments.
This can open up entirely new passive income pathways.
Is Note Investing Right for You?
If you:
- Want passive income backed by real estate
- Don’t want to manage properties
- Prefer predictable monthly cash flow
- Like being in first lien position
- Want an alternative to Wall Street investing
Then note investing is worth exploring.
It’s not magic. It requires education and due diligence. But it can be a powerful way to shift from being the borrower to becoming the bank.
Learn More About Note Investing
Fred Moskowitz is the author of The Little Green Book of Note Investing, and he breaks down everything from fundamentals to due diligence to using retirement funds.
You can connect with him at:
- Website: https://www.fredmoskowitz.com/
He also offers a free special report on note investing if you want to dive deeper.
Final Thoughts
You can listen to podcasts all day long, read books, and explore new strategies — but until you take action, nothing changes.
Whether it’s note investing, real estate, private equity, or another alternative asset class, the key is to start thinking differently about how your money works for you.
Because when you shift from borrower to lender, from equity to secured position, from Wall Street to mainstream investing…
That’s when you start creating real freedom.
Make it a prosperous week. And let’s keep creating ripples.