By now, some of you are thinking—yikes! I just want a good return on my investment so I can send my kids to university! This is all starting to sound too complicated! And some of you are thinking that all of this paperwork will take time—isn’t there a simpler way?
One way to invest with a real estate expert is using a Joint Venture Agreement, then splitting the profits and expenses for the property. And yes, there is some initial paperwork to set up that type of investment. Another way to invest is using a Promissory Note.
A Promissory Note is a legal document, between specific people, for a specific amount, with a pre-determined interest rate and payment schedule/dates. Again, everything is written down BEFORE money ever changes hands. Both parties agree on a principle amount for the loan, and both parties agree on the interest rate, as well as how the loan is repaid (like a typical mortgage with principal and interest monthly, interest only, lump-sum payment at a certain date, etc…). And YES this document can be registered, as a Caveat, to a specific property.
What is the advantage to the Lender? You decide how much to lend, how long to lend, and what the interest rate will be. You even decide how the loan will be repaid. Do you want monthly income of $500? Do you want it all returned at the end of the year in one simple transaction for your accountant? Do you want your money backed by a specific piece of real estate, but you don’t want to be on title for the property?
What is the advantage to the Borrower? With a Promissory note, the Borrower knows exactly how much the financing will cost them, and when those payments are due. One example of this is for “Flip” properties, where the Borrower needs to negotiate financing to buy the property AND financing to renovate it. Having access to the capital for renovations means no delays, often a better purchase price, and stronger profits from the flip. Did you catch that bit? Faster renovations and stronger profits means the lender gets their money back sooner, with even more security.
Which is better: JV Agreement or Promissory Note? Of course, it depends! This brings us back to WHY are you investing in real estate in the first place? What are your goals with your profits? What needs to happen in 5 years (or less) for you to feel that this was a great investment?
