Buying Real Estate with Notes: 2 Examples

by | BiggerPockets.com

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!

About Author

John Fedro

Investing since 2002, John started in real estate accidentally with a 4-bedroom mobile home inside of a pre-existing mobile home park. Over the next 11 months, John added 10 more mobile homes to his cash-flowing portfolio. Since these early years, John has gone on to help 150+ sellers and buyers sell their unwanted mobile homes and obtain a safe and affordable manufactured home of their own. Years later, John keeps to what has been successful—buying, fixing, renting, and reselling affordable housing known as mobile homes. John shares his stories, experiences, lessons, and some of the stories of other successful mobile home investors he helps on his blog and YouTube channeland has written over 300 articles concerning mobile homes and mobile home investing for the BiggerPockets Blog. He has also been a featured podcast guest here and on other prominent real estate podcasts, authored a highly-rated book aimed at increasing the happiness/satisfaction of average real estate investors, and spoken to national and international audiences concerning the opportunities and practicality of successfully investing in mobile homes.

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