What Are Notes Used For? – Investors Edition

Notes are a fantastic, flexible way to fund real estate deals of all shapes and sizes. Whenever ownership of real estate transfers from one  entity to another, there is usually a note involved somewhere.

Other than buying and selling, investors use notes to access the equity in their existing real estate holdings. Whether its a rehab loan, or simply access to quick cash, notes are an extremely useful way to access the capital tied up in real estate.

Here are the five main types of note used specifically by real estate investors…

Mortgages to Purchase or Refinance

Just like home owners, investors can take out a long-term mortgage if they want to keep hold of a property. This could be at the point they buy the real estate, but more likely it will be to refinance the property after they bought it.

These are typically long-term notes of up to 30 years, and have relatively low interest rates. In fact, a mainstream or investor mortgage is one of the cheapest ways to borrow money, which is why investors will usually refinance with this type of note.

Hard Money Loans

Hard money lenders – so called because it is money that is otherwise hard to come by – loan money to real estate investors. Typically, hard money is used to acquire properties when an investor does not have all of the cash available themselves.

Hard money loans usually attract a high rate of interest, upfront fees (sometimes defined as ‘points’), and will be relatively short term. Sometimes as short as 3 to 12 months. This is one of the most expensive ways to raise money, but allows investors to act quickly when buying.

Private Money Loans

Private notes are issued by a non-mainstream lender – usually just normal folk who have agreed to make a loan to a borrower. In most cases the private lender and the borrower will have a direct relationship. Private money is a great source of capital for real estate investors because it does not attract the same costs, fees and interest rates as hard money.

Real estate investors will use private money for much the same reasons as they would use hard money; to buy property, release equity or sometimes to fund rehab work. Specific terms can be negotiated much more easily with private money guys such as longer terms and better rates of interest.

Using Notes For Joint Ventures Investments

Some joint venture (JV) real estate investments can be structured using a note. This is often the case with private money loans where one investor  buys and rehabs a property, and another investor acts as the bank – providing a loan to investor no. 1.

These types of notes may also have an equity share clause, where the investor acting as the bank shares in the equity gains when the property is sold or refinanced.

Seller Financing

Investors might use a note to provide a mortgage to the buyer of their property. This is known as seller financing or owner financing. It is an attractive option for the buyer, as they can often access homes that they would not normally be able to buy, and they do not need a traditional bank loan.

Seller financing works for the seller because they get to access more buyers, and they can still create liquidity by selling the note, or borrowing against it to release cash