What is a Promissory Note?
A promissory note is a promise from one party to pay another party. In real estate investing, it is when one party agrees to pay another party a sum of money under set terms.
The note can be between one party and a lender, or between two individuals. The promissory note is a legally binding contract, as long as it is done correctly. There are several things that are included, although there can also be other items as well.
Items to Consider in a Promissory Note
- Principal amount
The principal amount is the original amount of the note.
- Interest rate
If the interest is included then it will be in the payback of the funds.
- First payment date
When is the first payment due?
- Number of payments
How many payments will it take to pay off the note?
- Frequency of payments
How will payments be made? Monthly, quarterly, etc.?
- Maturity date
This identifies when the loan will be paid off.
Are you putting any collateral for the payback of the note?
There are also two types of promissory notes. One is unsecured, where there is no collateral. In a secured promissory note the person paying back the funds will put up something like a house that they will lose in the event they don’t pay back the note
In the types of real estate investing I teach, a promissory note would generally be used in a seller carry back situation. This is when a seller keeps their loan in place and I, as the investor, take over the payments. And get the deed to the property.
For example, if I was buying a house from Sam and he is willing to carry $50,000 back. Then we would create a promissory note. The promissory note would state that I promise to pay Sam X amount of dollars and payment terms. This will make a seller more comfortable, and they will be more likely to work with you and sell you their home.
To learn more about investing in real estate without using your own cash or credit, I invite you to learn my strategies at the next live event! Or if you’re looking to invest in homes with other people’s credit, learn more about my investor kit.