Real estate offers investors a lot of advantages — but, also a lot of headaches! The alternative? Real estate notes. Notes offer the benefits of real estate investing without the headaches of being a landlord.
The key, believe it or not, has most likely been staring you in the face for some time. You drive by it. You live in it. You might even rent it out or vacation in it. I am talking about real estate. BUT WAIT…before you click through and move on to some other shiny object you need to know one very important fact. I am talking about the BENEFITS of real estate WITHOUT actually owning real estate. No roofs to repair. No Tenants to deal with. No calls at 10:00pm about a clogged toilet. Not only is this one of the hottest ways to make money ‘in’ real estate, it is also one of the oldest. If this interests you…read on…this may change your entire financial future.
We are going to cover:
- How Private Real Estate Notes are Created
- How EXACTLY Do You Make Money with Note Investing?
- How Do You Get Paid as a Note Flipper?
- Types of Marketing Campaigns for Note Investors
So, let’s start at the beginning: What it is. Who the players are. How you can be involved AND profit from it.
How Private Real Estate Notes Are Created
A private mortgage “note” is when someone sells a property (or business) to someone else… without involving a bank.
Have you ever seen a sign in front of a house that says “Owner will finance” or “Owner will carry?” That is someone creating a note…the buyer of the property will pay the seller of the property directly…
…and that is where you have an opportunity to make money.
Who are the note investing players?
Here’s a quick rundown…
- Seller – The person that SOLD the property and now is receiving payments on the note.
- Buyer – The person that purchased the property and is making payments.
- Finder – The person that finds the note seller and refers it to an investor for a fee. This finder could also be purchasing for their own portfolio rather than flipping the note to an investor.
- Investor / Funder – The person or company that purchases the note and will be the new person receiving the payments.
Some common questions about the note players…
Why would a Seller sell the note?
Many people that carry back a note never wanted to. They would have preferred a lump sum of cash up front. But, due to some sort of circumstance (hard to move property, buyers not qualifying with a bank) the seller of the property carried back a note.
Additionally, the seller may have thought it was a good idea at the time…receive a constant stream of payments…but then ‘life’ takes over and they have some sort of ‘need’ that has them wanting to sell the cash flow and get a lump sum of money…albeit, at a slight discount.
Why do Investors purchase notes?
Some of the most solid investments you can make involve real estate. Now, imagine being an investor, having the security of real estate but ALSO be able to determine your rate of return (in advance) AND the level of risk.
Try walking into a bank and tell them you want a double-digit return with your money.
What do note finders or flippers do?
Finders (also called “Brokers”) are often the middlemen/women. They put the two parties in touch with each other.
A finder could purchase the note themselves, but often, at least when starting out, don’t have the money to fund an entire note. That is where their contact with the Funders comes in handy. They put them both together and make a nice fee in the process. It is who you know that makes a difference. We even created a Directory of Funders to help finders make the right connections and save time.
So, who is the note industry for?
The Note Industry has been around for a long time. It is for anyone that is wanting to earn income full or part-time while building a personal portfolio of cash flow.
So, How EXACTLY Do I Make Money with Note Investing?
It is time to show you the money…your money!
It is very difficult to find a true win-win situation in any business. It is even more rare to find one that involves any aspect of money changing hands. The private note industry has survived because it is one of those rare instances where everyone ends up happy at the end of the day. Now that you know the players, let’s look at the money part of a deal.
Let’s say that “Jim” wants to sell his house for $120,000. “Nancy” wants to purchase the house but for whatever reason, she does not qualify for a traditional bank loan. There are a host of reasons that Nancy may not qualify. New Job, No Credit history, Self-Employed. It doesn’t make Nancy a bad person, she just does not fit the ‘bank’ requirements. Even with a $20,000 down payment, people just like Nancy can slip through the cracks every day.
Jim has a different motivation.
He wants to sell his house but does not have an immediate need for the money. He agrees to sell the house to Nancy and carry back the note himself. For all intents and purposes, Jim is the bank. Here is what their transaction looks like…
Sale Price: $120,000
Down Payment: $20,000
Note: $100,000
Terms: $877.57 a month for 360 months (10% interest)
This is a good deal for Jim as he is earning 10% on his money (and received a solid down payment). This is a good deal for Nancy because she is able to purchase the house, establish or rebuild her credit, and can re-finance at a later date.
That is an owner carry-back note and they are created every day.
Nancy will pay Jim $877.57 for 360 months (until she sells the house or re-finances and pays Jim off).
Things change.
Typically what happens in this situation is that something changes for the Jims of the world.
The owner of the note eventually has some sort of need.
Maybe Jim wants to purchase another property, has medical bills, or wants to buy a boat. It doesn’t matter ‘what’ the need is…Jim is only getting $877.57 per month and cannot get any more than that….
…but Jim can sell his note to someone else for a lump sum of cash.
This is where the Note Finder (or Note Broker) comes in.
A note finder is someone that is well connected and trained in the industry and can help Jim liquidate his note for a lump sum of cash.
Note finders gather information (via a worksheet) and submit the deal to a Funder for a quote.
Let’s take a look of what that looks like and how you get paid!
This is the note that Jim has after 5 years of payments have gone by…
Payments: $877.57
Number of Payments Made: 60
Number of Payments Remaining: 300
Current Balance: $96,574.44
- The Finder will fill out a worksheet with the above info as well as information about the property, etc.
- The Funder/Investor will send the worksheet back with some sort of offer.
Let’s say in this case, the investor wants to earn 11% on their investment. That means the investor would offer to pay $89,537.86 for the note.*
*Since the investor cannot go back to the payer and change the interest rate, the investor must pay less money for the same cash flow – that is how they get a higher return.
Now you have an offer from the investor in the amount of $89,537.86
How Do You Get Paid as a Note Flipper?
- Offer the seller of the note something LESS!
There are a lot of things to consider when deciding how much to offer the seller…the biggest being knowing WHY they are the selling in the first place. Matter of fact, we have written and created videos on the entire offering process – but let’s just keep things simple here.
Let’s say you want to make $3,000 for putting the two parties together.
You would then offer the seller $86,537.86 to Jim (our seller of the note).
If Jim agrees, the deal moves to closing where the funder/investor will do some due diligence – making sure everything checks out and then fund the deal.
Here is the final breakdown…
Jim will receive a check in the amount of $86,537.86
Jim is happy because although he sold the remaining balance at a discount, he has a lump sum of cash to go do what he wants to do.
Also, keep in mind that Jim also already received FIVE YEARS worth of payments (a cash flow of $52,654.20) – So he is pretty much just discounting interest and still received more than full value for his property.
The Finder (You) will receive a check for $3,000.00
The Finder is more than compensated for the effort and is paid for knowing not only the process but having direct contact with the Funders.
The investor will receive the next 300 payments of $877.57
The investor is happy because they are earning 11% on their money – far better than parking that money in the bank.
That is it. – In a nutshell that is the essence of a note deal.
Now, there a lot of creative ways to not only refer or purchase notes but also include yourself in a deal…even without having any money. Matter of fact, you don’t even need to purchase the whole note. You might have a deal where you only purchase some of the payments. Those advanced strategies are covered in other articles as well as our trainings.
Now that you know who the players are AND the basic principles of a note sale our next step is to learn where to find these notes.
How to Find Notes in Your Area or, Even Better, Have Notes Find You
But before we get to that, we wanted to take a quick second about the lifestyle associated with being in the note industry.
Some people are all about structure.
- They love the 9-5 job.
- They don’t mind punching a clock and racking up some vacation days.
- Heck, some people even love to commute!
- You put in the hours, working for someone else, and you get paid what they think your job is worth.
I know when we make a list like that it all sounds bad…but truly, it is not. Structure, although limiting in personal growth, can a very safe place to be (as long as your employer stays in business).
That IS NOT What the Note Industry is About.
The note business allows you to create your own structure.
For starters, a large number of Note Flippers and Investors simply work out of their homes. I suspect most people in our industry do not work 9-5.
Don’t get me wrong, the note industry IS a business and should be treated as such.
It also has a flexibility that some people can find odd at first.
For example, in 2017 we spent nearly seven consecutive months out of the country in Antigua, Guatemala – our business did not miss a step.
We have taken transatlantic cruises, spent months in the pacific northwest, and lived in Italy for a period of time. Again, our business did not miss a step – all we needed was access to the Internet.
We may choose to golf, take a long lunch, spend time with family, or see a movie in the middle of the workday. We can do these things because the note industry offers so much flexibility.
But again, this is a business and there are a few things you’ll want to equip for with this newfound flexibility.
Dedicated Space – Wherever you are, it is helpful to have some sort of dedicated space. Home office, the desk in the corner, or an entire room if you have space. This is where you work. When traveling for an extended period of time, it might be helpful to set up a temporary space in your rental location.
Tools – Technology was a game-changer for our industry and a laptop computer is a must – especially if you are looking at traveling. Companies like Ring Central will forward your calls (via the Internet) anywhere in the world.
Internet / Websites – The Internet is certainly our lifeline and having a website is essential for anyone serious about purchasing notes. The good news is that you can build (or hire someone to build you) a website at a very reasonable price.
Training / Knowledge – When we started there was not much information out there. We were lucky enough to meet people in the industry that shared with us some tools to get started. It is why we created NoteInvestor.com and the Note Investing Tools Membership – to help people succeed in this industry. It was our way of giving back!
Types of Marketing Campaigns for Note Investors
Although there are many creative ways to find notes and profit from them, there are largely five main marketing campaigns that most investors tap into…
Ads
Using ads to find people receiving payments on real estate notes. Here are two examples…
$$CASH NOW$$ Receiving Payments onreal estate sold? We pay top dollar for mortgages, trust deeds & contracts.Free report & quote.Company Name, Number & Website
NEED CA$H? We buy owner financed Mortgage Notes & Trust Deeds. Receive money in one lump sum.Call Name at NumberWebsite
NOTE: The ads are run online or in smaller papers such as the kind you see for free at grocery stores. Large newspapers cost too much and get lost in the shuffle.
Direct Mail
Sending letters or postcards to a verified list of note holders. Direct mail is very common especially since list companies have taken some of the hassles away from us. You can now purchase a list of noteholders, with the parameters you choose! Choose by note size, state, seasoning, etc.
Referrals / Building Your Brand
Networking with professionals to obtain referrals. In the end, nothing will trump building a solid foundation among those that can refer you notes. Although this process takes longer, it doesn’t cost a lot of money and, once built, is near bulletproof in an ongoing business.
Online
Building an online presence with websites, directories, SEO, and social media. It is difficult for any business to survive without some sort of online presence. Note sellers are savvy and turn to the Internet to learn more about selling their note as well as find a note flipper or investor. Additionally, the cost to create a website has come way down. We even created Turn-Key Note Websites for those looking for a solid shortcut.
Creating Notes
Flipping properties or selling properties and creating seller carry-back notes. Hey, why spend time looking for notes when you can create them? Real estate developers and rehabbers have learned just how much profit they have been leaving on the table by not paying attention to creating notes.
So, which one do you choose? Well, that really depends on your available time and budget. We have strategies for those with time and funds to dedicate to marketing as well as strategies for those just starting out…that may have more time, but short on funds.
- Are you looking for full or part-time income?
- What about lifestyle?
- How many hours do you want to dedicate to building your portfolio?
The choice is yours.
