Most investors are trained to think one way about real estate: Own the asset, capture appreciation, control the upside.
But there’s another side of the transaction that deserves attention—owning the debt.
On a recent episode of Ritter on Real Estate, I spoke with Eddie Speed, founder of NoteSchool, about note investing and what it looks like to step into the lender seat instead of the landlord role. As someone who primarily invests in equity and multifamily assets, I approached the conversation with healthy skepticism. Here’s what stood out.
Appreciation vs. Immediate Cash Flow
My first question was straightforward: Why give up appreciation? Equity investing offers:
– Long-term price appreciation
– Operational control
– Forced value creation
– Tax advantages
Eddie’s response focused on one distinction: appreciation is a future outcome. Interest income is contractual and immediate.
In today’s market, single-family rental margins have compressed. Nationally, average net returns on single-family rentals are hovering around 4% before debt service—down significantly from the 8% range many investors saw in the 2016–2018 cycle.
Inflation has materially impacted:
– Property taxes
– Insurance premiums
– Maintenance costs
– Labor and materials
Rents have risen, but not proportionally to expense growth in many markets. By contrast, a performing mortgage note may generate 9–11% annual interest, secured by real estate collateral. The investor isn’t responsible for repairs, tenant turnover, or capital expenditures. They collect payments. Different risk profile, different reward structure.
Market Cycles Drive Strategy
No strategy outperforms indefinitely.
– Post-2008: Rentals were extraordinary
– 2020–2022: Appreciation accelerated dramatically
– 2023–present: Higher rates and tighter underwriting have shifted the landscape
Eddie made a compelling point: banks don’t chase appreciation. They prioritize position in the capital stack and consistent yield. They get paid first. The question becomes whether, in certain cycles, occupying the lender position offers superior risk-adjusted returns.
How Note Investing is Structured
At a high level, note investing works as follows:
- An investor purchases an existing mortgage note
- The note is secured by real estate (often a primary residence)
- The investor receives monthly principal and interest payments
- A third-party loan servicer manages administration and compliance
The underwriting principle is straightforward: build in equity protection. Example:
– Property value: $350,000
– Note funded at: $250,000
That $100,000 equity cushion provides downside protection. The objective is not foreclosure—it’s performing income. But if default occurs, the collateral position mitigates risk.
What Happens If the Borrower Stops Paying?
This is the natural concern. Two safeguards matter:
1. Collateral Coverage: The note is typically acquired below current market value, creating embedded equity.
2. Professional Servicing: For approximately $25–30 per month, a licensed loan servicer:
– Collects payments
– Monitors taxes and insurance
– Handles regulatory compliance
– Manages default procedures if necessary
– Reports to the IRS
This removes most operational burden from the investor. Compare that to owning single-family rentals, where unexpected repairs, tenant turnover, and ongoing management require consistent attention. The difference is structural: the lender oversees; the landlord operates.
The Underserved Borrower Market
One statistic from our conversation was particularly notable: Approximately 40% of residential mortgage originations today fall outside traditional Fannie/Freddie/FHA/VA underwriting channels.
Underwriting standards have tightened significantly since 2019. Many self-employed individuals, business owners, and non-traditional earners—even those with strong balance sheets—do not neatly fit agency guidelines. That creates a sizable underserved segment.
Private lenders can step into that gap by underwriting risk differently—while still maintaining conservative loan-to-value ratios. This is not subprime lending. It is niche underwriting.
Time Efficiency and Scale
Operational intensity matters. Eddie argued that the effort required to oversee dozens of rental properties can rival—or exceed—the effort required to oversee hundreds of notes, because:
– Servicers handle administrative processes
– There is no tenant management
– There is no physical asset oversight
– There are no emergency maintenance calls
The investor focuses on acquisition discipline and portfolio oversight. For investors prioritizing time freedom or reducing operational exposure, this structure can be attractive.
Portfolio Construction: Debt and Equity
I remain fundamentally an equity investor. Long-term appreciation and operational leverage are powerful wealth drivers. However, the conversation reinforced a broader principle: capital stacks exist for a reason.
Debt serves a role in portfolio construction:
– Predictable income
– Priority in payment structure
– Lower operational complexity
– Potentially lower volatility
In certain market environments, increasing allocation to secured debt may improve overall portfolio stability. It’s not a replacement strategy, it’s a complementary one.
The Strategic Question
The real decision isn’t whether equity or debt is “better.” The real question is: Where are we in the cycle—and which side of the transaction offers superior risk-adjusted returns right now?
Real estate rewards investors who adapt, not those who anchor to a single model. Owning property works, operating assets works, and being the bank can also work. The key is understanding how—and when—to deploy each approach.