How Much Money Do I Need to Buy a Note?

You need the purchase price, the costs of checking and closing the deal, and a cash reserve for the day a payment is missed. The price follows the balance owed on the note, so there is no single entry figure. A smaller note or a partial takes less capital.

Why there is no one number

A note’s price starts from its unpaid balance and the payments left. A buyer then discounts those payments until the price gives them the return they want on their money. A small balance costs less than a large one, and a note with problems costs less than a clean one of the same size.

We publish no minimum, because any figure would be a guess about notes we have not seen.

The purchase price

This is the largest part, and you control it through the notes you choose to look at. Once you know how to price a note as a buyer, the pattern is plain: a lower balance, fewer payments left or a weaker file all mean a lower price. So does a partial, where you buy a set number of payments instead of all of them.

The cost of checking and closing

Before you fund, you pay for the work that tells you what you are buying:

A title report or an ownership and encumbrance report, to confirm the lien and what else is recorded against the property.
A property valuation, for example a broker price opinion, which is a local agent’s estimate of value.
An attorney’s review of the documents, and sometimes of the purchase agreement.
Recording fees for the assignment into your name.
A set-up fee if you place the loan with a servicer.

A title search costs about the same whether the lien behind it is large or small, so these items take a bigger share of a small purchase. Some of the money is spent even if you find a problem and walk away.

A reserve

A reserve is cash you keep aside and hope not to use. If the borrower stops paying, you may need to pay an attorney, cover unpaid property taxes or insurance to protect your lien, and go without income while it is sorted out. A buyer with no reserve is left with one move in a default, which is to sell the note at whatever price is offered.

Adding it up

Here is the sum with invented round figures, chosen only to show the arithmetic. A note priced at $60,000, plus $2,500 for checking and closing, plus a $7,500 reserve, calls for $70,000 you can leave alone. The costs and the reserve add $10,000, about 17% on top of the price. Put the same $2,500 of costs against a $25,000 note and it is 10% of the price, against about 4% on the $60,000 note.

An example, not a quote. Your own costs come from the title company, attorney and servicer you use, and the size of the reserve is your decision.

Starting with less

Notes on vacant land, mobile homes and lower-priced houses carry smaller balances. They also carry their own risks, so judge each on its merits. If you can buy part of a note instead of all of it, less capital goes in and it comes back over a shorter period, with the rest of the note returning to the seller afterwards. If you buy through a self-directed IRA, the account itself has to hold enough for the price, the costs and any later expenses.

Be careful with a low price as a way in. A non-performing note, where the borrower has stopped paying, costs less than a performing one and can need far more cash after purchase.

How much of your money belongs in one note

This matters more than the minimum. If one note is the bulk of what you have, one borrower’s bad year becomes your bad year. How much to commit is a decision for you and a financial adviser, and we are not in a position to make it for you.

Your own figure

Take the capital you can leave untouched for years, subtract a reserve, then subtract the checking and closing costs. What remains is the top of the price range you can consider, and it is the figure to give when you join the buyer list, because the form asks for the balance sizes you want to see. Settle it before buying your first note, and redo the sum whenever your reading of the investor guide turns up a cost you had left out.