Note investing buys an existing private mortgage note at a discount from its face value — that discount alone boosts the buyer’s effective yield above the note’s stated rate.
How it works
The note’s face value times its stated interest rate gives annual interest income. Dividing that by the actual purchase price (rather than face value) gives the yield on cost — higher than the stated rate whenever the note is bought at a discount.
What this does not include
This computes interest-based yield on cost only — it doesn’t account for the note’s principal paydown over time, prepayment risk, or the borrower’s default risk, all real factors in a note’s total realized return.
How to use this calculator
- Enter the note’s face value, stated interest rate, and the price paid for it.
Frequently asked questions
Why would a note sell below its face value?
Sellers (often the original lender or a fund) may sell notes at a discount for liquidity, to offload perceived risk, or because the note’s rate is below current market rates, making a discount necessary to attract buyers.
What risks does note investing carry?
Borrower default risk, prepayment risk (losing the expected income stream early), and the complexity of loan servicing and, if necessary, foreclosure — all beyond the pure yield-on-cost calculation shown here.
Is note investing the same as being a landlord?
No — a note investor holds the right to loan payments, not the property itself, unless a default eventually leads to foreclosure and property ownership.
