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4 Great Reasons To Invest In A Note Fund

Are you thinking about investing in a note fund? There are several very good reasons

why you want to add note investments to your portfolio. First things first, though, let’s

make sure we’re talking about the same thing.

What is a Note Fund?

A note fund is a form of passive investing. The sponsors of the note fund (oftentimes

private funds) raise capital from private investors or institutional investors. They may

use leverage and borrow capital from banks or other institutions.

Once the sponsors accumulate enough capital, they purchase notes. When I’m talking

about notes, I’m referring to notes collateralized by real estate.

The type of notes purchased depends on the business model of the sponsors and how

they’ve set up their fund. Notes can be backed by all types of real estate: residential,

commercial, developed land, raw land, etc.

The real estate notes can be performing, sub-performing, re-performing, or non


Once the sponsors purchase notes, they work the notes to produce income through

interest, by forcing the note to increase in value, or liquidating at a higher price. The

sponsors then make distributions to investors according to their initial agreed upon


So, why invest in a note fund? Here are 4 reasons to:

1. Stable Asset Class

A real estate note is a debt that’s secured by property. If the borrower defaults on the

debt, the owner of the note (or lender) can legally pursue collections on the real estate

to satisfy what’s owed on the loan.

This is a tangible or hard asset. A business or company stock can and oftentimes goes

to zero. It’s extremely rare for real estate that once had value to become completely


Notes belong in the Bonds category when people refer to “Stocks & Bonds.” Some real

estate notes are riskier than others but it’s similar to top tier debt versus junk corporate


(I wrote a blog post about the stability of our note funds during the pandemic here.)

2. Passive Investment

Note funds are ideal for passive investing. The sponsors (or operators) take care of the

day to day operations. They do the heavy lifting.

You get to leverage their experience, their connections, and their time. Real estate note

investing can be a very involved, time consuming business, with unknown risks for the

inexperienced investor.

For those that don’t have the time to develop the business operations and the

relationships to buy notes, investing in a note fund is the perfect alternative. You get to

be involved in the asset class without having to quit your full time job to do it.

3. Diversify Risk

If you invest in notes on your own, your capital is completely dependent on the outcome

of the few notes you are able to acquire. When investing in a note fund, you spread your

risk among the entire pool of notes that the fund owns.

For example, on your own, you might purchase 1 note for $50,000. Alternatively, you

could take that $50,000, invest in a note fund, and spread it across a portfolio of 20


If your one note doesn’t go as planned, your entire $50,000 is at risk of a loss. With 20

notes, the other 19 can make of for the under performing asset.

4. Quicker Returns

Note funds, in general, will have quicker returns to the investor than other private funds

such as commercial real estate syndications, where your money might be tied up for 5

to 10 years before liquidation.

In a performing note fund, you might get a stable income stream immediately. In a non

performing note fund, it might take longer but you could see your initial investment back

within 18 months. Preferred return and profits might take up to three years but you’ll be

able to re-invest your capital a lot sooner than in other typical real estate private



There are several great reasons to invest in note funds. If you want a stable, passive

investment that allows diversification of risk and quicker returns than other real estate

investments, then a note fund might be a great option for you.

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