Using Promissory Notes for Real Estate Investing 

Promissory notes are a popular way to earn a high yield (interest rate) while "parking some cash" between investments. In short, the investor becomes the bank for another investor’s project.  It's a popular alternative to Hard Money Loans as the costs usually are lower to the borrower.

You'll hear other terms bantered about for the use of promissory notes. All are valid: OPM (other people's money), OPC (other people's credit), private money, and other people's cash.  

When evaluating a promissory note, make sure to consider all of these factors together when deciding the terms to offer or accept. 

Evaluating Promissory Notes for Real Estate Investing

Here are a number of questions you can ask about using promissory notes for real estate investments: 

• What is the underlying project where the money from the promissory note will be invested?
  
  
• What interest rate will you use for the promissory note?
  
  
• What interest payment frequency (monthly, quarterly, annual, deferred?)
  
  
• Length of term (when is your principal due back?- important for real estate investing)
  
  
• Security pledged to back the loan (how safe is it?)
  
  
• If secured by real estate, what position will the loan be in and where will it be recorded?
  
  
• If personally secured, does the borrower have the financial resources to cover the note if the underlying project falls apart?  Do they have other specific assets they will pledge in writing to back the note?
  
  
• Do you understand ALL of the terms in the actual promissory note?

1. Need the money fast for an opportunity that cannot wait for bank turnaround times.
   
   
2. Borrower is out of borrowing capacity from traditional sources due to the number or amount of existing loans and needs OPM (Other People’s Money) to do a deal.
   
   
3. Higher risk project that requires offering a high interest rate to attract capital.

Finally, note that CRELounge.com is not a forum for matching promissory note borrowers and lenders.  Our focus is on real estate investing education rather than helping create or promote actual deals.  One web site that does offer this matching service is  www.prosper.com.