A cash flow note is a private debt that pays its holder a stream of scheduled payments over time. The phrase is trade shorthand for seller-financed mortgages, deeds of trust, land contracts and business notes, where the party being paid is an individual or a small company instead of a bank.
Where the term comes from
“Cash flow” means money arriving on a schedule, and a note is a written promise to repay a debt. Joined together, the phrase describes a promise that produces regular payments for whoever holds it.
It is broker and investor vocabulary. Someone who sold a house and let the buyer pay over time will more naturally call what they hold “the mortgage” or “the contract”, and both names describe the same piece of paper.
What falls under the name
| Type | How it arises | What secures it |
|---|---|---|
| Seller-financed real estate note | An owner sells property and carries the financing | A mortgage or deed of trust on the property |
| Land contract | An owner sells on installments and keeps title until paid | The seller’s retained title |
| Business note | An owner sells a business and takes part of the price over time | Business assets, a personal promise, or sometimes nothing |
| Mobile home note | A seller finances a manufactured home | The home, with or without land |
Some people stretch the phrase to cover other payment streams, such as structured settlements, annuities or lottery payouts. Those are separate products with their own rules and their own buyers, and this site uses “cash flow note” only for a privately held note. Each kind in the table has its own page in the note types guide.
You hold a right to be paid
Holding a cash flow note means owning the right to receive the payments, while the payer owns or occupies the property. If the note is secured, you also hold a lien, a legal claim against the property that you can enforce if the payments stop.
The money arrives only for as long as the payer keeps paying, and a holder whose payer stops has to enforce the note or sell it, on the secondary market for private notes, for less than it would have brought while it was performing.
What gives the cash flow its value
A buyer pays today for money that arrives later, so the price follows how much is coming, when it comes and how likely it is to arrive. The schedule is the starting point: the payment amount, the number of payments left and any balloon, which is a large final payment. The interest rate on the note matters because a higher rate means more of each payment is return to the holder.
The rest is about certainty. Seasoning is the run of payments already made on time, and a longer run gives a buyer more evidence. The buyer also weighs the payer’s credit, the property or assets behind the note and how much equity the payer has in them, whether the lien is first in line or behind another claim, and whether the documents are complete, signed and recorded.
All of this ends in a single figure, the yield the buyer wants on the money they put in. The buyer pays the price at which your remaining payments deliver it, and when that figure is higher than the rate written on the note, the price comes out below the balance owed. For the arithmetic on a sample note, see how note buyers calculate a price.
Keep it, sell it, or sell part
A holder can go on collecting, sell the whole note, or sell a set number of payments and take the note back afterwards. Keeping it returns the most money in total and leaves the waiting and the risk with you. Selling turns future payments into cash now, for less than the balance. A sale of some of the payments, called a partial purchase, sits between the two, though it depends on the note and on finding a buyer who offers one. Holding on is sometimes the better call.
If you hold one
Write down the facts a buyer would ask for: the payment amount, the number of payments left, the interest rate, the balance owed and how many payments have arrived on time. The payment, the rate and the term are written in the note. The balance and the on-time count come from your own payment records or a servicer’s ledger.
If you are unsure which of your papers is the note, the note basics hub has a page on each document, and one on how a seller-financed note is created in the first place. With the five facts written down you can ask what the note would sell for and set the answer beside what the same payments would bring if you went on collecting them.
Related questions
Is a cash flow note the same as a mortgage note?
A mortgage note is one kind of cash flow note. The wider term also covers land contracts, business notes and mobile home notes, which are priced and documented differently.
Can I sell part of a cash flow note?
That depends on the note and the buyer. In a partial purchase you sell a set number of payments for a lump sum and the rest of the note comes back to you. Some buyers do not offer partials, and some notes are unsuitable for one, for example where few payments remain.
Who buys cash flow notes?
Individual investors, small funds and note-buying firms. Each has its own required return and its own preferences, which is why offers on the same note can differ.