STRATEGY
NOTES
Create Your Own Note ACTIVATING EQUITY WITHOUT A 1031 EXCHANGE
by Steve Streetman
ood for you! You’ve been investing and you have a nice
terms you are happy with and you will use that note as a down payment on a new property. Perhaps you think that creating a note is some arcane process. Per- haps you wonder who would accept a note for real estate. But as a real es- tate investor, you have used notes in your real estate transactions. After all, what are dollars but certificates of debt? Even the term ‘banknotes’ indicates that they are nothing but a claim on an obligation. You are not the government or a bank. But companies also create notes (they call them bonds). To create a note secured by real estate, you usually need two doc- uments (this will depend on what State or Country you are in and the local laws). The first document is a promissory note that outlines how much currency the note is for, the interest rate, payments, terms, etc. The closer to market rates you make these terms the more attractive your loan will be to note purchasers or to sellers who might accept the note as a down payment. The second
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piece of rental real estate where you’ve built up equity. But you have noticed that the return on that equity is not the best each year. Traditional- ly, you would say it’s time to sell and use a 1031 deferred tax exchange to move the money into a new property. There are rules, of course, for how to handle the sale and purchase: rules about timing, about the cost of your next property, and the amount of debt you must have. And darn it, you kind of like the property. It is in a good area, continues to appreciate, and it has a special place in your heart. Going to a bank to get a loan against it may be challenging if it doesn’t cashflow like a champ. Is there another way? Well of course there is another way. In fact, there are many ways to handle this, but I would like to focus on one that not too many people think of in creatively structuring deals: Creating Your Own Note (CYON). In a nutshell, you will create a loan secured by your property on
70 | think realty magazine :: july 2020
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