This is definitely a niche area of real estate investing, but here is a simple explanation.
A note is the agreement for someone to repay a certain amount of money, over a specified period of time, at a specified interest rate.
Let’s say you provide seller financing for the property. The sale price is $100k, 10 year term, 10% interest. Payment is $1321. This is the note.
10% is a high rate of interest for a real estate note, so you turn around and sell this note to an investor who wants to make a high return on their cash for $100k. Now, the monthly payments go to the investor instead of you, and you walk away with the $100k.
There are some catches. One, the note is only as good as the person making the payments. If you haven’t set this up for success, nobody is going to buy it for the full face value. In reality, most notes sell for a discount over the face value.
Next, most note buyers want to see a history of payments before they buy. So the note needs to season at least six months before you can sell it.
While this is a niche activity in real estate investing, it’s actually something banks do every day on a much larger scale. You can make money buying and selling notes if you know what you’re doing.