Note investments are not limited to a single form of collateral or contract. They can be structured through various security instruments, each offering distinct risk and return profiles. Common types include:
- Mortgages – Traditional notes secured by real estate, often backed by a first or second lien position.
- Deeds of Trust – Similar to mortgages but often provide a more streamlined foreclosure process in certain states.
- Land Contracts – Agreements where the seller retains title until the buyer fulfills payment obligations, offering unique control and risk characteristics.
- Installment Contracts and Personal Property Notes – Instruments secured by assets like mobile homes or business equipment, which can provide higher yields in niche markets.
Benefits of a Mixed-Instrument Portfolio
1. Risk Diversification
- Reduces dependency on any single asset class or foreclosure process.
- Balances stable, lower-yield assets (like first-position mortgages) with higher-yield opportunities (such as land contracts).
2. Geographic and Legal Flexibility
- Different instruments perform better under different state laws.
- Allows the fund to capitalize on favorable foreclosure or repossession environments.
3. Yield Optimization
- Blending various instruments can improve weighted average yield.
- High-performing niches (like mobile-home-backed notes or contracts-for-deed) can boost returns while spreading operational risk.
4. Liquidity and Exit Options
- Different security types attract different buyer pools, improving liquidity.
- Enables tailored disposition strategies—some notes can be refinanced, others sold or restructured.
Strategic Advantage
By blending multiple security instruments, a private equity note portfolio achieves both stability and performance—anchoring returns in well-secured, predictable assets while capturing upside in specialized, higher-yielding opportunities.