Buying Real Estate with Notes: 2 Examples

In this article

Ideally, I have a number of goals, whenever I enter into a real estate transaction which I intend to buy and hold for passive profits.  Two very important goals of any deal are to allow the home I purchase to pay for itself, and to allow the home to pay me cash-flow every single month.  By using this formula I keep more cash in my pocket while investing plus make a cash on cash return through the roof compared to forking out thousands of dollars in purchasing costs.

Below are 2 such examples where I happily used the help of 2 real estate Note Buyers to help close a couple creative win-win deals.

The year was 2003 and I was all set to purchase a 3/2 block home from a seller ready to sell her residence of 5 years to me subject to the mortgage of $40,000 and allowing me to give her a Note for $15,000 in equity.  The value of this property at the time was over $90,000, but I had no intention of simply flipping this home for a fast profit.  The existing mortgage payments where low with a 6.25% fixed interest rate and monthly payments — I would easily be able to cash flow $700 plus per month.

There was just one hitch. The seller wanted at least $11,000 CASH to walk away from her property and deed me the home.  The $11,000 cash to walk away still leaves $30K plus in equity but in order for this deal to fit my formula, I cannot be spending tens of thousands of dollars for each home I invest in.

The Solution:

A seasoned investor and also Note Buyer friend of mine that I had met at a local REIA meeting offered to buy the Note from the seller once I purchased the home.  After reviewing his terms and the cash-flow-ability of the subject home I gave the seller a Note for their equity in the amount of $15,000 at 5% interest.  Once the home closed my Note buyer gave my seller a check for $11,000 and she assigned the Note to him.

Benefits to:

My Note buyer makes 5% interest and $4,000 over 5 years with a Note backed by a great piece of property; plus through our friendship, he knew I was very likely to pay.

I purchased a great home with NO cash out of pocket plus making incoming cash-flowing payments of $416.07 every month once I filled the home with low-risk renters.

The Seller got the $11,000 cash that they wanted at closing plus, he was able to walk away from their unwanted home.

The 2nd deal I have for you is a bit more involved but equally as fun!  I approached a manufactured home seller (my bread and butter homes) with the intent to purchase and cash-flow the seller’s home.  After going back and forth with the seller I struck a winning offer to purchase the FREE and CLEAR home with seller held financing for $28,000 including the land the home sat atop.

Due to the low competition of manufactured homes in my area I was getting this home for an undervalued bargain but I still did not want to come out of pocket $28,000 ALL CASH.  The typical Notes I structure when purchasing homes are for payments of a specific amount paid to the Note holder monthly.  In this case the seller did not want monthly payments but rather yearly payments of $4,000 for 7 years totaling the $28,000 purchase price.

The Solution:

At closing we did not create just one Note for $28,000 we created seven “12 month” Notes for $4,000 at 9.5% interest each starting 1 year after the next.  It was then the seller’s choice to contact my Note buyer and sell 1 Note per year.

Benefits to:

My Note buyer picked up a cheap $4,000 Note at 9.5% interest on a note she knew I would repay.  This Note Buyer was different from the first — she was actually a family member that had extra money that was not making close to 9.5% interest in her bank CD.

I was able to purchase a nice manufactured home on land and not have to worry about coming up with cash for closing.  Each month I continued to pay out $350.75 to the Note holder while my incoming payments were over $900.  $900 minus a debt service of $350.75, minus taxes and insurance roughly $75 per month equals almost a $500 NET cash-flow per month.

The seller ended up selling 1 Note per year to my Note buyer as agreed.  Towards the end of this 7 year term, the ex-seller cashed in these Notes around Christmas time for holiday expenses.

Realize that after you have proven yourself a competent real estate investor people will be willing to invest in you for a profit.  It is important to find out Note buyers’ purchasing criteria and begin to establish a mutually beneficial relationship.  It is these types of friendships that can really make your investing career fun and profitable.

Always stay Win-Win!

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.