How Separate Note Portfolios Can Both Speed Up AND Enhance Your Retirement Income

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Averaging 12-18 hours a week talking with real estate investors about their plans for retirement, common denominators show themselves, as you might expect. After all – when you boil things down to the basics, most folks fall into many of the same categories.

When asked, for example, about the timing of their retirement, they usually agree on yesterday afternoon around 4:30. Then there are those like me, who continue working, regardless. They love what they do, so retirement is merely the day they get to say they’re working by choice.

One of the most common misconceptions in long term real estate investing is when to apply various strategies. Many times they don’t realize highly productive strategies, when mistimed can literally retard the potential retirement cash flow they so highly covet.

The GrandDaddy of all mistimed strategies is that of capital growth and cash flow. In my experience the timing of capital growth and cash flow are virtually axiomatic.

To the extent you go full throttle for one, you inhibit the production of the other. 

There are many ways this happens, especially when the investor puts all their eggs in the cash flow now and at all costs ‘basket’. Of course, talking about the timing of cash flow and capital growth begs for the real definition of cash flow, a universally bastardized concept if there ever was one.

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First Off, Cash Flow is Nothing but a Yield on Capital

The yield typically doesn’t fluctuate much when the size of your equity/capital is considered. All that means is that if the yield on capital is X%, you’d prefer it to be on $1 million, not $100,000. And there’s the rub.

When cash flow is mistimed, inhibiting capital growth, the ultimate cash flow, coveted by the investor — retirement cash flow — is virtually destined to be less than it would’ve been. Again, you can choose to brag about your cash flow leading up to retirement, or in retirement, but not both.

But What About Notes?

Now you’ve done it, because investors easily see the benefit of notes, especially when it comes to the immediate cash flow. If you’re one of those, pat yourself on the back, cuz inclusion of a separate note portfolio as part of your retirement plan is not only advisable, but enthusiastically encouraged in most scenarios. Here’s why.

Notes are a lot like weeds, but in a positive way. Unless we go out of our way to kill ’em, they’ll not only thrive, but grow. Imagine you could acquire every single piece of real estate you could afford at 45-60¢ on the dollar. That’s how note buyers do it. Sometimes they buy for less than that.

Generally speaking, even if they screw up like Hogan’s goat, they still manage a double digit yield/return on their capital. That in no way is meant to imply that over the long haul a given note investor won’t be forced to foreclose every now and then.  It’s almost a lock that foreclosures will happen, and don’t let anyone tell you otherwise.

The thing is, by establishing a separate note portfolio with an eye towards a separate source of income at retirement, the investor — that’d be you — will set up a tremendous opportunity for the use of Strategic Synergism. Since you don’t need the income ’til retirement it’s now available to help in the elimination of real estate debt — OR — as the source of premium payments towards the tax free retirement income provided by a well structured EIUL.

Either way, you’ve made the following things — not nearly an exhaustive list — at least highly possible, if not likely.

  1. Adding a note portfolio provides an independent, additional source of income at retirement.
  2. Before retirement the after tax income from notes provide you with the ability to speed up real estate debt elimination by or before retirement.
  3. Even if it’s entirely dedicated towards funding an EIUL, it’s directly made possible a third source of retirement income that will by definition be tax free.
  4. Notes tend to pay off at some point. Who knew? When they do, you reap the built in benefit you ensured when you paid so little for the note at purchase. Pay a relatively small cap gains tax, buy a lot more notes with bigger monthly payments comin’ your way.

If the phrase, ‘tax free’ puts a smile on your face, beginning yet another note portfolio in your Solo 401k (Roth side, of course.) or Roth IRA will do the trick, and in spades.

In fact, let’s do a scenario. You have $300,000 in non-Roth IRAs and rollable 401k plans. You roll all of it into a Solo 401k, then immediately move it into the Roth ‘side’ of the plan. Know in advance the IRS will instantly have their hands out for taxes at that point. We’ll assume you can only pay those taxes from the funds themselves. Ouch, that hurts. Let’s further assume your $300,000 turns into a whole bunch of $180,000. (There’s NO universal after tax answer, as everyone is different due to wildly varying circumstances.)

If that $180,000 acquires a note yielding about 13% cash on cash, the monthly payments would be roughly $1,950, about $23,400 annually. Although I’m the first one to say predicting note payoffs is pure folly, let’s have some fun anyway. 🙂

Historically, home loans have paid off in, give or take six years. Since the bubble, however, it’s increased to around nine years. Let’s use 10, ok?Never mind that the payor on the notes you’ll acquire has lived in the home a few years before you bought the note.

Here’s how it’d roll out for your plan. The only difference between Roth and ‘traditional’ is not during the pre-retirement years, but at retirement when you begin taking money out. Roth, of course, will be tax free. Not so for the ‘traditional’ plan. We’ll also assume you have 20 years before your retirement begins. You’re now 40 years old.

Let’s say your $180,000 bought a $325,000 note with a 6% fixed rate. (And yeah, they’re there.) The payment is the aforementioned $1950/mo., $23,400/yr. 

In 40 months you’d have accrued approximately $78,000 in monthly payments. Time to buy another note. 🙂 Let’s say this one is a bit more expensive, say 60¢ on the dollar. That means you just picked up the new note with a balance of around $130,000 or so.

Again, we’ll use the 13% yield, which results in about $10,100 yearly. You’re now receiving $33,500 a year in note payments to your plan. 36 months later — notice how things are accelerating — your payments have yielded the tidy sum of $100,500.

Time for another note, right? Right. This time out let’s say you do better than last time, finding a note you can buy for 50¢ on the dollar. That’s a $200,000 note. The payments run $13,000/yr. Rounding down a bit, your plan is now bring in over $5,000 monthly, around $46,500 annually.

24 months down the road, and guess what time it is? See what I mean about growin’ like weeds? You have another $93,000 which you immediately use to buy a $160,000 note. It’s annual payments are approximately $12,000/yr, rounding down a bit.

Your total yearly payments have now grown to $58,500, give or take. In just 18 months you buy a new note for around $150,000 or so. It’s annual income is about $11,200, rounding down just a smidgeon. Your plan’s annual note income has now reached $69,700.

About 10 years have gone by at this point, 118 months. You’re halfway to your goal of retiring in 20 years, or 2033.

18 months later your plan’s garnered another $104,500 or so. You acquire a note in the amount of $190,000 with an annual payment income of, give or take, $13,500. The new total annual payments from your plan’s notes has now reached $83,200. We’re gonna take this right down to retirement. 🙂

Another 18 months goes by, yielding (rounding down) $124,000. That yields annual payments to your plan of around $16,000 yearly (rounded down). You’re now just short of six figures annually in payments coming to your plan from discounted notes. It’s now at around $99,200.

This could go on for seven more years, and I’m runnin’ outa time to do the numbers. Here’s what happens in the those last years ’til retirement. You buy roughly a dozen more notes, all of which yield annual income to your plan in the range of $15-25,000. You’re able to buy so many more in such a relatively short period of time cuz the accumulated annual payments keep goin’ up and up with each purchase.

If you only acquired another eight notes, your income by then would’ve risen to approximately $250,000 a year. As you can readily discern, those last few years are huge producers for you.

In fact, we’ve probably undershot the actual income you’d likely have created. But let’s stick with it for now.

Was there anything we left out? Oh yeah, those pesky foreclosures.

There’s no way, no how anyone buying that many notes over that long of  a period of time will not experience some foreclosures. It WILL happen, and don’t ever let anyone try to convince you it won’t. Still, you would’ve come out fine due to your strict buying parameters, which insisted on a maximum of, give or take, 65% loan to value, based on the amount of capital you invested.

So yeah, you’d of spun your wheels a bit, wasted some time. And yeah, that would have definitely had a somewhat negative impact on your end game.

But wait, what else did we leave out?

Remember, this is all done inside your Solo 401k, the Roth side, which is funded with after tax money, and distributed tax free, once you hit 59.5 years young.

What we never allowed for during the entirety of those 20 years was even a dollar of contribution from you to the plan.

Most folks would be puttin’ in as much as they possibly could, up to the maximum of either $17,500/yr. before 50, or $23,000/yr. after.

Let’s say you averaged roughly $10,000 a year for the 20 years. Even if we just use $200,000, eschewing the time value of money, that alone woulda generated another $40-80,000 a year in income.

But isn’t there something else we forgot?

Son of a gun, we sure did. Remember when we said the original note purchases and all the rest would average (what a joke) around 10 years to pay off? We did that knowing that the most recent data, 2012, showed that nine years is the new average.

We didn’t allow for those note payoffs ever. Not a one.

If they had averaged around a decade per note (what a joke, nobody can know), both the plan’s note portfolio face value and it’s annual income would have shown an increase of 80-120%.

In other words, counting foreclosures we didn’t include, plus any contributions you were able to make over the years, plus random loan payoffs during the 20 year period, your actual retirement income would likely have been far, far and away more than $250,000. And all of it tax free by definition. Imagine if you live in a high income tax state when at retirement.

A tax free income of just $250,000 is akin to $325-400,000 in pre-tax income. Also, that income assumes you never ever had a note pay off. That’s simply not gonna happen. Meanwhile, back at the ranch . . .

All those 20 years also had you buying discounted notes in your own name. That was in order to enhance the investments you made in real estate. I’ve talked about the Strategic Synergy which can be implemented between income property and notes in previous posts.

In a nutshell, applying after tax note income to income property debt will allow you the following potentials:

  1. At the very least you’ll have paid off your portfolio’s RE debt sooner rather than later. Sometimes VERY much sooner.
  2. Depending upon your retirement timeline, having the ‘right’ amount of after tax note income at your disposal can sometimes make it possible to buy more indebted real estate. This will obviously result in more retirement income, as Captain Obvious is sure to point out.
  3. Aside from the benefits of #’s 1 & 2, what do you think might have happened with your personal note portfolio given 20 years to grow like a weed? Yeah, go ahead, it’s ok to smile at this point. 🙂
  4. For some, if able to pay off a portion or all of their RE portfolio with enough time to spare, the newly free & cleared RE can be arbitraged into even more notes and the subsequent income. In many cases, if done with solidly reliable analysis, the investor would still be able to arrive at the scheduled retirement date with their RE portfolio again completely free of debt.

Picture your income in 20 years if you executed this plan’s concept

You’d have $250-500,000 in tax free income from your Solo 401k. Experience says since notes tend to pay off randomly, you’d have a lot more than the low end of that range. You’d have whatever the debt free cash flow of your RE portfolio yields.

Being relatively conservative, let’s say that’s around $50,000 a year. I know, reason says it’ll be higher than that, but work with me.

Your personally held notes would likely have grown to somewhere in the neighborhood of $50-100,000 a year. All of it would be taxable, of course, but it’s better than a stick in the eye, right? Oh, and about all those notes.

They don’t stop growing like weeds just because you retired. They’ll keep paying off randomly, and you’ll keep buying more of ’em, happily resulting in raises in retirement. HappyFeet Dance.

I’ve left out a few things you would’ve done over the two decades we gave you. But you can clearly see what’s possible. The cool thing is that there’s nothing in this approach that isn’t slow and boring. It’s all conservative, none of it requires hanging by the chandeliers. Retiring either sooner, or with more income, or both is a good thing.

Photo Credit: Thomas Leuthard

About Author

Jeff Brown

Licensed since 1969, broker/owner since 1977. Extensively trained and experienced in tax deferred exchanges, and long term retirement planning.


  1. Jeff,

    Thank you for the article. You left out the most important part of it: where these notes are sold for 60c on a dollar and why?

    More questions:
    What is the minimum amount of notes I can buy? Is $10K enough or should I cough up at least 100K?
    Can I do this inside a traditional IRA that is with a regular broker?
    If not, who would be a custodian of such IRA?


    • Jeff Brown

      Hey Nick — I asked those questions back in the mid-1970s just before I bought my first note. They sell for whatever discount they do as a function of what the market says the yield should be. Take the 10 year Treasury Bond for example. If you went into the market at 4% and the yield in future years fell to 2%, your bond would likely sell for much more than you paid for it. Risk, and all the other factors contribute to ‘market’ yield on real estate notes.

      A non-performing note in second position might fetch less than 30¢ on the dollar, sometimes less than 20¢. The security in a solid note investment comes largely from the investor’s real world LTV. The idea is never to buy a note you won’t be happy at the thought of foreclosing. 🙂

      • Jeff,

        Thank you for replying. I have some follow up questions though.

        So, notes are essentially junk bonds where each note is tied to a certain property, right?

        I found this website: which seems to provide an exchange place for buyers and sellers. Do you use this site? If not, how do find your notes?

        Here is an example from the site:
        Price: $292k
        UPB%: 100%
        Rate: 8%
        LTV: 41%

        Does it mean that the amount of note is $292K but the house is worth $712K (292/0.41)?
        What is 8% rate in this case? Is it based on the $292K or the original loan amount?
        Does UPB% mean “unpaid principal balance”? If so, does 100% mean that no principal has been paid?

        Is this overall a good deal or not? What is the risk of notes comparing with mortgage REITs?


    • Jeff Brown

      I forgot to address your IRA questions. I’d strongly suggest you have a conversation with John Park, an expert on self-directed plans and what they’re allowed to do, custodians, trustees, and the like. He can be found at Hope this helps.

      You likely won’t need $100k to start, but will need more than $10k. It’s like anything else, Nick, we’re always captive to the current market inventory, yields, prices, etc.

      • Thanks for the IRA tip. BTW, is IRA a requirement or a “nice to have” for a note investor?

        So, $10K won’t get me started but what is the “magic” number?

        Also, what about diversification? Should I buy several notes instead of just one or two to sleep well at night? How many?


        • Jeff Brown

          A self-directed IRA/401k isn’t necessary, or even recommended for some. Still, if you can wait ’til you’re 59.5 for the income, as is the rule, it’s a definite benefit in many ways. For example, I have many clients who’ll first retire before that age on cash flow from real estate and their personal note holdings. They may also have an EIUL or two. They might retire at 50 on RE cash flow and notes, then at say 55, 60 or so their EIUL, if they have one might kick in. Finally, they turn 59.5 and the tax free income from their Roth type plan kicks in.

          Not sure what ya mean by diversification in this context. But if your retirement derives its income from real estate, personally held notes, IRA/401k held notes, and maybe an EIUL to boot, I’d say you’d be diversified in that sense. Note diversification is a different story. You either have the right factors in place or ya don’t. Between LTV, and maybe spreading them around geographically would make some feel better.

          The thing about notes is that they grow organically and on their own, so to speak. From your first day as a note investor you can look forward to random ‘raises’ consistently. It’s not a matter of if, but when. For the record, that’s another significant difference between notes and annuities.

          The face amount of the first note I ever bought, in 1976, was just under $10k. It cost me a lot less. It depends upon what you’re willing to buy, Nick. There are 4th position notes I’d buy long before some 1sts, believe me. At that amount though, you’d most probably be buying a small, private note. Some of those can be tasty.

    • Jeff Brown

      Novices, in my personal opinion, shouldn’t be buying notes based upon their judgment only. Period. End of sentence. Over ‘n out. It’s not like real estate, Allison. Find somebody you know and trust to help you. They’re out there. There’s a few here on the BP blog too.

  2. Thanks Jeff for a very informative post; I like your strategy. My company recently froze our pension plan, and now I’ve been thinking a lot about retirement and real estate. Does your strategy work as an alternative to a pension or annuity? It seems that notes may be more volatile than annuities, but have a higher return.

    • Jeff Brown

      A very cogent question, Katherine. First off, regardless of their seeming similarities, annuities and notes are more apples ‘n oranges than alike. They both involve investment capital, payments coming to the investor, and a more or less known yield. Notes yield more, generally, due to the perceived risk. But the seasoned note investor understands where the security/safety resides in owning notes. LTV can make or break a note investor.

      The short answer to your question though, is that a professionally picked note portfolio will provide more retirement income than an annuity. On the other hand, some folks prefer the ease of acquiring the annuity, regardless of their lower yield and income.

      I have and will continue to put my own family into notes. 🙂

  3. Amazing read. One of the better articles from one of the better posters on one of the better sites. You win a gold star.

    I know nothing about notes, so forgive the naivety of the questions, but:
    1- how are these notes administered? Do you use a TPA? And if so, what is their cut?
    2 – My read is that this ladder-approach would peak at the day of retirement – at which point the distributions go into living expenses (or trips to Europe) rather than more notes, meaning the income would decline over time. Is that accurate?

    Again – thank you for the awesome read.

    • Jeff Brown

      Hey Jeremiah — Muchas thankias. Once you begin buying notes, having an experienced professional servicing company, at least for me, is a must. Though I’m waiting ’til next week to release details on a note project in which I’m involved heavily, most notes can be handled for $15-25 a month or so. They handle payments, accounting, and the rest of the busy work involved in stayin’ on top of things.

      The ‘ladder’ approach never really stops, Jeremiah. Though once you retire you begin living off of the payments, the notes themselves keep randomly paying off, allowing you to buy more/bigger notes with equally bigger payments comin’ your way. It’s how note investors keep gettin’ ‘raises’ even in retirement.

      The only ‘decline’ would come, as you implied, by the switch in the use of note payments. Where before retirement they’d accumulate to the point where buying another note was possible, after retirement those payments are used by you to enjoy life. But, as I said above, the notes themselves allow you to keep increasing note income as time passes.

  4. Jeff, another incredible post of hard earned wisdom! Thanks, sent this off to #1 Son for future reading/reference as he fine tunes his RE investment strategies. I am going to have to graph this one out as I sense you greatly underplayed the potential return from these note strategies!


  5. Jeff,

    I understand that you need to be an accredited investor to be able to invest in notes correct? If we do not have that status yet, are we still able to invest through our 401k or perhaps an LLC?

    • Jeff Brown

      Whether or not you’re an ‘official’ accredited investor or not is completely irrelevant when buying notes. On the other hand, if you wanna be in a note ‘fund’ specializing in notes, most of them will make their note portfolio unavailable to anyone who’s not an accredited investor. I’m starting such a fund, which will specifically allow my clients, even if unaccredited, to have access to the notes.

    • Jeff Brown

      Yes, there’ll be a servicing company ready to roll. 🙂 And for the record, it might be better for you if you didn’t wait to get into notes ’til after RE dries up. Notes can be a huge factor in putting you in better position for the down part of the real estate cycle.

  6. I’m so pleased to see this article. I have a Self-Directed Roth IRA that I set up about 6 years ago to invest in Tax Lien Certificates, which have a nice return: 5% – 18% (in FL) Since I am a Note Broker, I added Notes to this IRA, which is set up as an LLC, with check-writing privileges.

  7. Hi Jeff,
    Fabulous information as usual. Having recently started my own home-based business, I’m wondering if you could mention how it works with contributing with notes with my future business income. I am eager to learn more!

  8. Hi Jeff,

    I’m not sure what got me more jazzed up, your article or the Equity Trust conference I just returned from in FL. Both were great reminders we can all be doing more with our retirement accounts. And yes, I’m biased, I love notes. In fact I’m addicted to notes. Nice piece.


    • Jeff Brown

      So sorry for the tardy reply, Les. Yes, I do broker notes. For reasons I’ll post in my next BP article, I stopped brokering notes to investors back in the 80s. I can put you on to a reliable source if you’re interested.

  9. Hi Jeff,
    I just found this article from one of your other articles and I am blown away but missing something. When you talk about ‘notes randomly paying off’ I’m not following. Don’t the monthly payments just keep coming at the same amount until the full amount is paid off? (Assuming no foreclosure) It reads to me like there is a balloon payment at the end but I’m guessing I am just misinterpreting.

    Thanks again for the great info!

  10. Jeff – , ignore that ‘question’ of mine. My mental dog has lifted and I realize people sell the house and pay off the note (or inherit, win the lottey)

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