When you think of a real estate note, you probably think of a mortgage in order to finance the purchase or refinance of a piece of property. Well, buying real estate notes is also an investment strategy used by thousands of investors. You can earn a return on the money you invest in the real estate note. When talking about investing in real estate notes, you may also hear terms such as hard money lenders or private notes because personal money is used as financing funds for the property. When you invest in real estate notes, you receive monthly principal and interest payments based on the note amount and continue to receive the monthly payments until the note is paid in full. Here’s an example of a note buyer in action:
Nick Noteholder sold his home 2 years ago for $200,000. However, since the buyer of his home could only come up with $150,000 for the purchase Nick agreed to hold a note (secured with the house as collateral) for the remaining $50,000. The terms of this note specified that the buyer would pay nick 60 payments (5 years) of $833 per month (interest not included for scenario simplicity). 3 years later, Nick finds himself in a financial bind and needs some quick cash. At that point, the buyer already paid Nick about $30,000 but still owes $20,000 on the note. Nick finds YOU (the notebuyer) You agree to buy the note at a discount for $15,000. Now the buyer ends up paying you the remaining $20,000 by simply continuing to pay his $833 per month for the next 2 years.
Now you have an extra $5,000 in your pocket not including any interest that may have been attached to the note.