How I Bought a $42K Note With $17K of My Own Money

Let me tell you about a deal I just did, because it's a pretty clean example of something I've been getting more comfortable with lately: you don't always need all the money to do the deal. Sometimes you just need to control the deal and have a decent handle on the math.

Here's what landed in my inbox a couple weeks back.

The asset

A first-position note on 10 acres in Oklahoma. Seller-financed land deal, fully amortizing, paying like clockwork on auto-ACH.

• Monthly payment: $771.62

• Payments left: 117 (just under 10 years)

• Note rate: 11.9%

• Asking price: $42,000

Run that buy price against that payment stream and you get a yield to maturity of 18.29%. Translation: if I pay $42K today and just collect the payments, I earn an 18.29% return on my money. All day long, I'll take that.

One problem. I didn't have a clean $42K I wanted to bury in a single note right now. So we had to get creative…

The structure

I raised $25,000 from an investor. Here's the deal I gave them:

• 12% preferred return on their money

• Paid $750 every quarter ($3,000/year)

• Minimum one-year hold, then they can tap out with 90 days' notice and get their $25K back

I put in the other $17,000. So the note's bought, I control it, and I've got someone else's cash doing most of the heavy lifting.

Now watch what happens.

The spread (a.k.a. making money on someone else's money)

The note throws off $9,259 a year in payments.

My investor gets their $3,000. They're thrilled - 12% on a passive, paper-backed deal is a great return for them, and they never have to think about it.

That leaves $6,259 in my pocket. On $17,000 of my own cash in the deal, that's a 36.8% cash-on-cash return - and I haven't sold a thing. That's just the spread between what the note pays me (18.29%) and what I pay my investor (12%), sitting on a stack of money that's mostly not mine.

The exit (where it gets fun)

Say a year goes by and I want out. I sell the note to the next investor.

Here's the part that took me a while to wrap my head around, so it's worth slowing down on: the lower the yield a buyer will accept, the more they pay you for the same payments.

I bought to an 18.29% yield because the note was unseasoned and I was the one taking the leap. A year later it's got a 12-month track record of on-time payments. So I sell it to an investor who's happy with a 15% yield - a totally fair number for a seasoned, performing, first-position note.

Lower yield to them = higher price to me. That note sells for about $44,980.

I paid $42,000. So on top of the cash flow, I book a ~$2,980 gain just on the spread between the yield I bought at and the yield I sold at.

Tallying it up

Where the money came from

Amount

Cash flow spread (year 1)

$6,259

Gain on the sale

$2,980

Total profit

$9,239

I had $17,000 in this deal for one year. I walked with $9,239.

That's a 54% return - on a $42,000 asset I couldn't have bought by myself.

Why I'm sharing this

This is just one deal, and plenty of it still has to play out. I'm sharing it because the structure is something I wish someone had walked me through years ago, and maybe it sparks an idea for you.

A few things made it work, and none of them required already being rich:

• It came down to understanding yield, not price. I bought to an 18% yield and figured I could eventually sell to a 15% yield, so I had a rough sense of the spread before I committed. A lot of us were taught to shop on price. With notes, the yield is the thing that actually tells you what you're getting.

• The investor got a genuinely good, boring deal. 12% paid quarterly, backed by paper, nothing for them to manage. That's the kind of return someone will happily do again, which is how you turn a one-time check into an actual capital partner.

• I controlled the whole deal with the smaller piece of the money. $17K of mine, $25K of theirs - and I got to make the calls and keep the upside.

And the part I find the most freeing: I don't even have to sell. If I'd rather hold, I keep collecting that ~$6,300 a year in spread, and whenever my investor wants their money back I can either bring in someone new at 12% or buy them out and own the note outright. Having the exit be optional is, to me, the whole point.

That's really the idea behind the Huddel - old money buys the asset and waits, but you can structure a deal so you're able to get in well before you're "rich enough" to write the whole check yourself. If you've got capital sitting on the sidelines, or you're a deal away from your first note, maybe there's a version of this that works for you too.

Anyway - thought it was cool, figured I'd pass it along. Hit reply if you want me to nerd out on the numbers with you.

-Jake