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Investor Insights Blog|Using Seller-Financed Notes to Build Your Retirement

Real Life Examples

Using Seller-Financed Notes to Build Your Retirement

The following was written by guest blogger W.J. Mencarow , Founder of The Paper Source.


W.J. Mencarow
W.J. Mencarow

As a current professional and veteran in the performing seller-financed note industry I would like to share with you one way that you can start to build towards your retirement by purchasing seller-financed notes. Here’s an example to demonstrate this retirement-building method.

Real Estate Secured Note Case Study

In this real-life example, the property securing the note is ¾ of an acre of improved land in Hesperia, California. It sold for $30,000 with a $6,000 down payment and the seller carried back the note for $24,000 at 8-percent interest amortized for 10 years with a monthly payment of $291.19.

When the note holder wanted to gauge the investor’s interest in purchasing it, she had already received 17 payments, leaving 103 payments remaining and a current principal balance of $21,646.83.

In doing extensive due diligence, the investor found the buyer was a builder and had already started to build a home on the property. The property buyer’s/note payors’ credit was excellent, the title was clean, clear, and up-to-date with no issues, and the appraisal came in for much more than the sales price of the property.

Investing in assets that are discounted can provide a ‘margin of safety’ – room for error, imprecision, bad luck, or the fluctuations of the economy.

W. J. Mencarow, Note Investor and Founder of The Paper Source

The property seller/note holder accepted an offer of $15,000 for the note, signed it over to the investor, and contacted the note payor instructing him to make future payments to the investor.

The investor then considered two options:

  1. He could sell the note to another investor for $17,400 and make $2,400 immediately, or;
  2. He could keep the note and collect the rest of the payments. At a purchase price of $15,000 for a yield of 18.46 percent he would then receive 103 payments of $291.19 and collect $29,992.18 if the note went the full term.

He decided to keep the note and collect the payments for the full term.

15-Minute Guide to Notes Investing with a Self-Directed IRA

What if this note was purchased by his self-directed Roth IRA? All of the payments would then go into his self-directed IRA to use and invest again.

Value Investing: In It for the Long Term

Value investing is the practice of finding and purchasing assets for less than they are worth. Investing in assets that are discounted can provide a “margin of safety”- room for error, imprecision, bad luck, or the fluctuations of the economy. The value investing philosophy emphasizes in-depth fundamental analysis, pursuit of long-term investment results, limiting risk and resisting crowd psychology (jumping on the bandwagon of the “latest and greatest” investment).

Value investing limits an investment made based on emotion or feelings. Generally, a value investor is in it for the long term.

Successful value investors combine detailed asset research and valuation work with endless discipline and patience, well-considered sensitivity analysis, intellectual honesty, and years of analytical and investment experience.

Investments in performing seller-financed notes are often considered value investments (as in the example above), because the intent is to purchase them for long-term passive income.

If you are interested in learning more about investing in performing notes, seek out educational materials and note investing events and speak to experienced investors. It might end up as one option in your retirement planning portfolio.

[For more note investing case studies, as well as a 15-minute guide to note investing, click here.]

Watch: Client Greg discusses seller-financed notes and other strategies he uses in a self-directed IRA

W. J. Mencarow founded The Paper Source, Inc. in 1987 with his wife and business partner Alison. He and Alison have been note investors since 1981. He is the editor of THE PAPER SOURCE JOURNAL and she is the publisher. In addition to numerous articles in THE PAPER SOURCE JOURNAL and other publications, he is the author of the guidebooks “How To Get Started In Notes Without Using Your Own Funds,” “Almost Everything That Could Go Wrong With A Note and How to Prevent It” and several seminars. They received the coveted Founder´s Award for starting the first nationwide cash flow publication and first industry national convention and were inducted into both the Mortgage Report Hall of Fame and Metropolitan Mortgage´s Note Industry Hall of Fame. In 2014 he was recognized as the “Note Educator Of the Year” by the Note Investors Summit.

W. J. Mencarow is not an employee of Equity Trust Company. Opinions or ideas expressed are not necessarily those of Equity Trust Company nor do they reflect their views or endorsement. These materials are for informational purposes only. Equity Trust Company, Equity University and their affiliates, representatives and officers do not provide legal or tax advice. Investing involves risk, including possible loss of principal.

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