How to Utilize A Promissory Note for Securing Private Funding

Using other people’s money is the key to successful real estate investing without taking the big risk of using your own cash or getting credit through a big bank lender. To get what I call “lazy” money, you need to find private funding, where you guarantee the lender through a promissory note when and how they will be paid back. Simply put, a promissory note is an IOU that guarantees that you will pay the money back to the lender.

A private lender will be much more likely to provide you with the funding you need if there is a promissory note because it gives them legal protection to get their money back if you were to default. It is similar to what a big bank lender would do through the foreclosure process. In addition to the promise of paying the money back to the lender, there are a few other things you can do to make the private lender comfortable making an agreement with you, including:

1. You can add them to the insurance policy so that if something happens to the property, they are protected.
2. If they want more information, you can have an appraisal done in addition to showing them the comps of what the property is worth.

You then need to come to an agreement on other terms like the length of the loan, interest rates, etc. When you are ready to have the note prepared you can do it through a title or escrow company.

There are also ways you can protect yourself. One way is to establish the “right of first refusal.”

In this case, if the private lender comes to you with the IOU and say they need the money immediately, even if the terms are not up. They can then go and sell the note on the open market, usually for a discounted rate. However, having the right of first refusal can put you in a position to buy back the note for less than your original note. For example, say the note is worth $20,000, and they are offering it up for $15,000 on the open market, they have to come to you first and allow you to buy the note at the discounted rate. This means that while the original note was $20,000, you have the chance to buy it back for $5,000 less.

There are many ways to invest in real estate without using your own money, and I cover them in my Unlimited Funding guide, that will walk you through the methods I have perfected and use in my own real estate investing.