Investing in mortgage notes has made many people very wealthy and created cash flows for them that come in every month. I think of notes as cash-flow machines that you build, plug in, and then they produce income for you for years. The best news? There is no limit to how many of these machines you can build if you have the right tools.

Most people have some idea of what a mortgage note is, but not that many really understand how the investment vehicle might work for them. Here, we examine the life of one mortgage note to demonstrate the vast potential in note investing.

The Note is Born: John Sells to Jane

John sold his home to Jane for $250,000. She put down $50,000. Instead of getting a loan from the bank for $200,000, she signed a  6-percent-interest, 15-year note to John secured by a mortgage on the house.


  • Jane makes principal and interest payments to John of $1,687.71 per month.
  • John sells his house and gets $50,000 in cash along with a monthly income from the note of $1,687.71.


The Note Moves On: John Sells the Note to Bob

Five years later, John needs cash. He can sell Jane’s note without changing the payment and terms on Jane’s end. Bob will pay John $128,000 for the note. Should John accept?

Here’s what John has to consider:

John has received $1,687.71 a month for 60 months, so Jane has paid John $101,262.60 so far. Bob offers $128,000 for the note. In total, John will have received $229,262.60 for his $200,000 note. John decides this is a good deal.

Here’s what Bob has to consider:

$128,000 invested returning $1,687.71 a month for 10 years gives Bob 10 percent interest on his money. In the unlikely event that Jane defaults, Bob can foreclose and get a $250,000 house. The collateral is worth far more than the investment. Jane has paid reliably for five years. Bob is getting a 10 percent return on his money. Bob decides this is a good deal.


  • John sells the note to Bob. Jane continues to pay her  mortgage on time to Bob.


The Note’s Life Ends: Jane Sells the House

Jane lives in the house for another three years before she takes advantage of rising home values and sells the house for a healthy profit. The new owner takes out their own loan on the house and pays Bob in full.


  • Bob received three years monthly payments of $1,687.71 a month and a lump-sum payment of the remainder of the debt.
  • Jane no longer owes any money on the note and has plenty of money to buy another house (or anything else she likes!)


Note investing is not always quite this simple, but this example demonstrates the massive potential in this investment strategy.

  • W.J. Mencarow

    W. J. Mencarow has been investing in real estate and notes for over 30 years. He and his wife Alison founded The Paper Source ( to teach note investment. They host a radio show broadcast all over the Texas Hill Country ( and on most podcast sites. He served in the US Congress as chief of staff, legislative director and press secretary. He is an ordained minister (PCA) and has written several books.

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