In the Introduction to Notes article, we learned that a real estate note is a legally binding agreement between buyer and lender guaranteeing the buyer will reimburse the lender over an agreed time with agreed monthly payments.
Below is a continuation of the amortization shown in that article. This example shows the monthly payments over the remaining life (20 years) of the loan, assuming a 7% return. Purchase price for the loan was $40,125. At the end of the 20 year period, the interest earned will be $34,515.
One way of converting this payment stream into a partial note is to partition the payment stream into two halves: years 1-10 and years 11-20, as shown below.
The amount the partial note investor would pay up front is $26,800. Over the life of this partial note, the partial note investor receives interest in the amount of $10,520. Be the bank! Once the partial note investor exits at year 11, the original note investor resumes receiving the full 7% from the back half of the loan.
Via the partial note investment strategy, the partial note investor has a pretty good idea what their outlay is, what their earnings are, and when the earnings will occur. If you are considering this strategy, you are hopefully asking yourself, “What could go wrong?”
The short answer is: as long as the property owner (i.e. the borrower) makes their payments on time, the cash flow of both the original investor and the partial note investor is steady and predicable. There is another article on this website entitled Plan B.