It’s disconcerting after decades of relatively painless borrowing and relatively “easy” money to realize that not only are banks hurting, but they are not even interested in loaning the majority of the population money. In fact, many real estate investors are starting to consider getting out of the business, selling off their properties and resigning themselves to other business ventures.

However, this does not have to be the case. Even if you are not interested in owning properties at this point in time or you feel that flipping properties and short sales is not your personal success-route or passion, then you can participate in this real estate market in a unique and profitable way that will not only enhance your wealth, but will also help other investors in the process.

The fact of the matter is that banks have lots of bad loans on their books, and this has created two problems:

1. They have too much bad debt to enable them to legally accumulate good debt.

2. Most homebuyers – investors or not – cannot get money from banks and are looking elsewhere for funding.

This leads naturally to a discussion of the business of real estate note investing, also called “the paper business”.

Real estate note investing involves the trading of real estate mortgage notes rather than the real estate itself. Real estate note investors view the note itself as the medium to achieve profit and income rather than the appreciation of the property. To a note investor, real estate is little more than the asset used to secure the value of their note.

Here are the basics: When a person borrows money to purchase a property, they sign a large mound of paperwork. The two most important documents in this stack of paper is the “note” and the “mortgage”.

The “note” is conceptually very simple. It’s job is to identify the borrower, identify the lender, specify the amount borrowed, and describe the terms under which the money will be repaid (such as interest rate, late fees, due dates, penalties, etc.).

The “mortgage” is the second extremely important document. It is in the mortgage that the borrower gives the lender the right to foreclose the property if the borrower does not comply with the terms of the note. In some states, the mortgage is called either a “Deed of Trust” or a “Security Deed”.

But how do you benefit from this knowledge? Stay tuned – in tomorrow’s edition of the Bryan Ellis Real Estate Letter, we’ll start to pull back the curtains and expose why the “paper business” is where real estate investors tend to gravitate as they gain more experience.

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