What’s Your Exit Strategy? A Case for Converting Your Real Estate to Paper Assets

by | BiggerPockets.com

When first starting out in real estate investing, I was pretty much like everyone else. I was looking for Financial Freedom. At that time, I hated my day job working in Corporate America and was looking for cash flow in hopes of one day, someday breaking free.

I was a contractor and a realtor, and so I was drawn to real estate investing because it seemed like a safe, secure investment that not only had collateral, but even had some tax advantages with deductible mortgage interest, depreciation, and the like.

So, it was around that time that I got to about 20 units, and I had enough positive cash flow that I could entertain the idea of leaving my day job. The only real issue I had was that, when I went to double my portfolio, I soon found out that although I had freedom of my schedule, I really didn’t have true freedom of time. I had just replaced one job with another. In fact, in many ways, I had more liability and responsibility.

And then…

I was introduced to the world of notes.

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Using Notes for Financial Freedom

In the beginning, I learned about notes from the hard money lenders and the seller financed note speakers at my local Philadelphia REIA meeting. Sure, I got to hear Jimmy Napier, Pete Fortunato, and Donna Bauer. But early on, I just didn’t seem to get it.

Finally, it was finding private money for my own deals that made the most sense. I started using some private money for my own transactions, and then later on I started to lend money out from my Self-Directed IRA, retirement accounts and eventually with my Home Equity Lines of Credit (HELOCs) on my investment houses and apartment buildings.

Related: Real Estate Notes vs. 401k: Which Investment Wins Out Over 30 Years?

The first eye-opener for me was when I met a local hard money guy named Jim Bennett from Stonehenge Funding. This guy at one point had well over 200 houses, and this Wharton School of Business graduate was literally the largest hard money guy around. It took me a while to connect the dots that he too was in the notes business. Maybe that starts to explain why he wasn’t trying to double his portfolio to get to 500 rental properties someday.

So, as I started to see the correlation between hard money and the seller financed note world, I was gaining more and more experience with my own private note portfolio. Not only was I doing first mortgages for bird dogs (rehab funding), but I was even holding second mortgages when I was selling off some of my own properties.

Although I was doing property management at a local RE/MAX at the time, I quickly realized the benefits of paper. I no longer had to deal with contractors, townships, tenants, and toilets. My life was becoming easier to manage, with more time, and I truly believe that I was even making more money. It just seemed easier dealing with folks who had an ownership interest in the property.

But What About Real Estate as an Exit?

This might stir the pot some, but what I started to realize after owning rental units since 1989 was that the normal real estate exits aren’t always the best. For example, I remember writing about this famous local RE guy, who owned a large number of units, and he spoke one night at a sub group, where I asked him “What is your exit going to be from real estate?”

He was even talking about how he was battling cancer and going through chemo, and he really didn’t have an exit strategy other than leaving the stuff to his daughter. It was then that I realized his real problem; it was the same as mine.

What if Your Heirs Don’t Want Your Properties?

Unless you’re setting up a Charitable Remainder Trust or 1031 Exchanging your way into a Real Estate Investment Trust (REIT), oftentimes your heirs may not want your real estate. My wife and kids would want to shoot me if I left them all the problems I deal with on a daily basis. They really just need passive income from the assets I’m leaving behind; thus the value of the paper.

Converting Real Estate to Paper Over Time


After owning a three bedroom row home for ten years, the property doubled in value, and then I sold the property to a friend’s LLC. His new commercial loan paid off the remaining balance of my first mortgage and then some. Then, I turned around and did a seller assist and held a five year interest only second mortgage for the difference of the sale price and his first mortgage. He was able to acquire the property with no money out of pocket and still cash flow, and I was able to cash flow off of a house I no longer owned.

Related: 4 Arguments for Investing in Real Estate AND Notes for Retirement

Slowly but surely, I’ve been converting my real estate investments to paper assets. Today, I have a couple of entities that own a pile of notes, and, trust me, they’re a lot less work than my real estate portfolios. It consists of private money, private seconds, institutional firsts, and institutional second mortgages.

In fact, I currently have an investor looking at my 18 remaining rental properties, where he is looking to use a commercial blanket, and I’ll gladly give this investor a seller assist and hold a nice commercial second mortgage for him. I’m hoping that 2015 is the year of the deal. He’ll get a great cash flowing portfolio with little or no money out-of-pocket, and I’ll continue to cash flow off real estate I no longer own or have to deal with. Now, that’s true financial freedom in my eyes, and I’m sure my heirs will be thanking me later, too.

So, what’s your exit strategy from your real estate?

Let’s talk in the comments below!

About Author

Dave Van Horn

Since 2007, Dave Van Horn has served as president and CEO of PPR The Note Co., a holding company that manages several funds that buy, sell, and hold residential mortgages nationwide. Dave’s expertise is derived from over 30 years of residential and commercial real estate experience as a licensed Realtor, a real estate investor, and a fundraiser. As the latter, Dave has raised over $100 million in both notes and commercial real estate. In addition to his investments and role as CEO, Dave’s biggest passion is to teach others how to share, build, and preserve wealth. He authored Real Estate Note Investing, an introduction to the note investing business, helping investors enter the “other side” of the real estate business.


  1. serge s.

    Very interesting and relevant post Dave. I am in a very similar situation as you were and am beginning the transition to private notes. Your strategy of taking seconds is very interesting. Couple questions regarding the private seconds where you are the seller of the home:

    Are you selling these homes to seasoned investors personally known to you and are you selling at retail price?

    Where do you come out on LTV?

    What type of interest only rates are you charging and what is the buyers exit strategy at the 5 year balloon.

    I wonder if I could stomach the risk of holding the second if I was not working with a known entity and was selling where there was still room for the buyer to refinance. On the face of it seems like a win win situation all around and a strategy I will seriously consider.

    • Dave Van Horn

      Hi Serge,
      Thanks for your comment!
      For the most part, yes, I am selling to seasoned investors that I know and typically at retail price.
      Regarding LTV, the buyer gets their first mortgage in place for around 70-80% LTV, and then I usually pick up the balance up to 100%, with a seller assist between 3-6%.
      Most of these have been around 10% interest-only.
      My exit strategy with a five year balloon is either to get cashed out or to extend it.
      I hope this info helps! Let me know if you have any other questions.

  2. Dan Shaker

    Thank you so much for this article, Dave! This one is an eye opener especially if you are already planning to exit the world of real estate. I don’t have any plans yet of doing so not even in the near future but this article sure gave me an idea on how to do it right when the time comes. Nice article!

    • Dave Van Horn

      Hi Dan, thank you for the positive feedback!
      Just so you know, I didn’t mean that it has to be a full exit from real estate either. For example, I didn’t up and sell all of my properties to transition into notes. I still own quite a bit of properties, but this is a strategy that helped simplify my life over time.

  3. Brian Gibbons

    I think “equity stripping” is a good way for asset protection, that is taking all the equity out and maybe moving it into notes.

    The more real estate you OWN vs OWNING PAPER the better.

    Who is the best asset protection attorney on BP?

    @Douglas Dowell?

    Primer in Equity Stripping

    Here is a rule I have, Own nothing, control everything. Think partnerships, options, Private Loans, etc.

  4. Hi Dave,
    Heard about notes when I was doing mortgage in Las Vegas a three years ago. I still didn’t understand much about your article but it sounds wonderful. I will be making time to do research and due dilligence if the rules and laws about notes there in the U.S. applies in this part of the world.

    Wonderful article, Thanks

  5. Alan Mackenthun

    I wouldn’t feel the slightest guilt leaving a dozen or two rental properties to my wife or kids. My wife is fully on board acquiring the real estate. My kids will just have to suffer . (The poor boys – maybe I should just sell em all out and blow them money so they can buy me a house when they get a bit older like I had to do for my parents).

    Honestly, if my kids expressed the slightest concern about inheriting rental properties from me, I could and would easily solve that problem for them. I could always set up a trust and gift them to a church on my death. Walla – the kids don’t have to worry about managing rental properties.

    • Dave Van Horn

      Hi Joel A.
      I haven’t had to foreclose on loans I personally own, although I have had to send a demand letter once. At our business, we’ve had to, but it’s not that much work if your foreclosure attorney is doing it.
      Yes, most Loan servicers do have specialty servicing options available. They can do more than payment and administration if you want them to.
      I hope this helps!

  6. Austin S.

    Love the strategies in this article Dave. I have been thinking of putting my 2 rentals up for sale and carrying the down payments in 2nd position. I have about 25% equity in each. Do you find that banks are ok with the buyer not having any of their own money down on these transactions?

    • Dave Van Horn

      Hi Austin,
      Thanks for your comment!
      Regarding your question, it matters less for commercial deals than for residential. With residential, it may be more of a concern, but you can still do the deal as long as you’re originating the second post-closing of the first. Also, this may be easier if the buyer already has assets. Feel free to message me if you want me to get more specific on how it’s commonly done.

  7. Amber Touch

    I’m very interested in notes, too. It seems like most real estate investors only get into notes at the end of a period of acquisition, though. Is it possible to jump directly to the notes? Do I need a large amount of cash saved up first?

    Also, can anyone point me in the direction of some books I can read to learn about notes and other paper?

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