In mortgage note investing, not all loans look the same—and that’s a good thing. Notes can range from performing, where borrowers pay on time each month, to non-performing, where payments have stopped. Each status offers its own balance of risk, reward, and strategy.
Understanding the Spectrum of Note Statuses
Performing Notes Loans with consistent, on-time payments. Investors benefit from predictable cash flow and lower risk exposure.
Re-Performing Notes Loans that were once delinquent but have since resumed payments. They typically trade at a discount to fully performing notes while offering attractive yields.
Non-Performing Notes (NPNs) Loans where borrowers have fallen behind or stopped paying. Though riskier, they offer significant upside potential through workouts, modifications, or property recovery.
The Benefits of a Mixed Portfolio
A portfolio diversified across payment statuses provides balance and optionality:
Stable Income Stream Performing loans anchor the portfolio with reliable monthly cash flow.
Value-Add Opportunities Re-performing and non-performing loans allow active management strategies—loan modifications, borrower engagement, or collateral recovery—to increase returns.
Risk Mitigation Exposure to multiple note types smooths out performance volatility. When one segment underperforms, others can offset it.
Capital Efficiency Blending performing and distressed assets allows investors to deploy capital across varying yield targets, creating a more optimized overall return profile.
Strategic Advantage for Investors
By managing a spectrum of note types, a private equity fund can:
- Capture both steady income and capital appreciation opportunities.
- Adapt to changing market conditions—tightening credit cycles or rising property values.
- Leverage experience and scale to manage risk intelligently across asset classes.