REAL ESTATE

FINANCING
NOTES AND MORTGAGE

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INTRO
FINANCING CAN BE A VERY IMPORTANT COMPONENT OF
INVESTING IN REAL ESTATE.
IN GENERAL, WHEN INVESTORS DESIRE TO OBTAIN FINANCING,
THEY USUALLY PLEDGE, OR HYPOTHECATE, THEIR OWNERSHIP
OF REAL ESTATE AS A CONDITION FOR OBTAINING LOANS.
IN MANY CASES, INVESTORS ALSO PLEDGE PERSONAL
PROPERTY TO OBTAIN LOANS.
NOTES AND MORTGAGES ARE TWO LEGAL INSTRUMENTS THAT
ARE USED FREQUENTLY IN REAL ESTATE FINANCING.
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MORTGAGE LOAN
IN A MORTGAGE LOAN, THE BORROWER
ALWAYS CONVEYS TWO DOCUMENTS TO THE
LENDER: (1) A NOTE, AND (2) A MORTGAGE.
THE NOTE DETAILS THE FINANCIAL RIGHTS
AND OBLIGATIONS BETWEEN BORROWER AND
LENDER, E.G., WHETHER A LOAN CAN BE PAID
OFF EARLY AND AT WHAT COST, WHAT FEES
CAN BE CHARGED FOR LATE PAYMENTS, ETC.
THE MORTGAGE PLEDGES THE PROPERTY AS
SECURITY FOR THE DEBT.

THE NOTE
AS IN RESIDENTIAL MORTGAGE FINANCING,
THE NOTE IS THE DOCUMENT USED TO
CREATE A LEGAL DEBT.
THE NOTE OFTEN DEALS WITH (1)
AMOUNTS AND TIMING OF PERIODIC
PAYMENTS, (2) PENALTIES FOR LATE
PAYMENTS, (3) RECORD KEEPING, (4)
HAZARD INSURANCE REQUIREMENTS, (5)
PROPERTY MAINTENANCE, AND (6) DEFAULT.

CLAUSES CONTAINED IN THE NOTE

1.
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Real Estate Financing

Loan Amount
Method of Repayment
Interest Rate
Term
Acceleration Clause
Prepayment Provisions
Late Payment Provisions
Due on Sale Clause
Escrow for Property Taxes/ Insurance
Maintenance of Property
Default
Loan Guarantees

THE MORTGAGE
AGAIN, THE MORTGAGE COMES WITH
THE NOTE.
THE COMMERCIAL MORTGAGE ENSURES
THAT LENDERS CAN HAVE THE
PROPERTY SOLD TO SATISFY THE DEBT
IF BORROWERS DEFAULT.
OVERALL, COMMERCIAL MORTGAGES
AND NOTES ARE NOT AS
STANDARDIZED AS HOME LOANS.

MORTGAGES AND FINANCIAL

CALCULATIONS
HOW MUCH SHOULD AN INVESTOR PAY TODAY FOR A
REAL ESTATE INVESTMENT THAT WILL RETURN $20,000 AT
THE END OF THREE YEARS, ASSUMING THE INVESTOR
DESIRES AN ANNUAL RETURN OF 15 PERCENT INTEREST
ON THE AMOUNT INVESTED?
HOW MUCH SHOULD AN INVESTOR PAY TO RECEIVE
$12,000 THREE YEARS FROM NOW, ASSUMING THAT THE
INVESTOR DESIRES AN ANNUAL RETURN OF 9 PERCENT
COMPOUNDED MONTHLY
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 AN INVESTOR HAS AN OPPORTUNITY TO INVEST IN A

RENTAL PROPERTY THAT WILL PROVIDE NET CASH
RETURNS OF $400 PER YEAR FOR THREE YEARS. THE
INVESTOR BELIEVES THAT AN ANNUAL RETURN OF 10
PERCENT SHOULD BE EARNED ON THIS INVESTMENT.
HOW MUCH SHOULD THE INVESTOR PAY FOR THE
RENTAL PROPERTY?

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ANNUITIES

IF AN INVESTOR WANTS TO KNOW HOW MUCH HE OR

SHE SHOULD PAY TODAY FOR AN INVESTMENT THAT
WOULD PAY $500 AT THE END OF EACH MONTH FOR THE
NEXT 12 MONTHS AND EARN AN ANNUAL RATE OF
RETURN OF 6 PERCENT COMPOUNDED MONTHLY ON THE
INVESTMENT
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INVESTMENT WITH SINGLE

RECEIPT
ASSUME AN INVESTOR HAS AN OPPORTUNITY TODAY TO
BUY AN UNIMPROVED ONE-ACRE LOT FOR $5,639. THE
LOT IS EXPECTED TO APPRECIATE IN VALUE AND TO BE
WORTH $15,000 AFTER SEVEN YEARS. WHAT RATE OF
INTEREST (OR INVESTMENT YIELD) WOULD BE EARNED
ON THE $5,639 INVESTMENT IN THE PROPERTY IF IT
WERE MADE TODAY, HELD FOR SEVEN YEARS, AND SOLD
FOR $15,000?

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YIELD ON INVESTMENT
ANNUITIES
SUPPOSE AN INVESTOR HAS THE OPPORTUNITY TO MAKE
AN INVESTMENT IN REAL ESTATE COSTING $3,170 THAT
WOULD PROVIDE HIM WITH CASH INCOME OF $1,000 AT
THE END OF EACH YEAR FOR FOUR YEARS. WHAT
INVESTMENT YIELD, OR INTERNAL RATE OF RETURN,
WOULD THE INVESTOR EARN ON THE $3,170?

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AMORTIZATION SCHEDULE
CALCULATE THE PAYMENT PER PERIOD
DETERMINE THE INTEREST IN PERIOD T (LOAN BALANCE
AT T-1 (I%/M)
COMPUTE THE PRINCIPAL PAYMENT IN PERIOD T
DETERMINE THE ENDING BALANCE IN PERIOD T
START AGAIN AT STEP 2 AND REPEAT

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LOAN AMORTIZATION
JULLIAN BORROWS RS. 10,000 AT A COMPOUND ANNUAL
INTEREST RATE OF 12%. AMORTIZE THE LOAN IF ANNUAL
PAYMENTS ARE MADE FOR 5 YEARS.

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OTHER FINANCING SOURCES

SELLER FINANCING
A SOURCE OF CREDIT FOR A REAL PROPERTY
BUYER IS OFTEN THE SELLER. IF THE SELLER
IS WILLING TO TAKE BACK A MORTGAGE AS
PART OR FULL PAYMENT OF THE PURCHASE
PRICE, IT IS REFERRED TO AS SELLER
FINANCING.

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SELLER FINANCING IS USED

WHEN
THIRD-PARTY MORTGAGE FINANCING IS TOO EXPENSIVE OR
UNAVAILABLE.
THE BUYER DOES NOT QUALIFY FOR LONG-TERM MORTGAGE
CREDIT BECAUSE OF A LOW DOWN PAYMENT OR DIFFICULTY
MEETING MONTHLY PAYMENTS.
THE SELLER DESIRES TO TAKE ADVANTAGE OF THE
INSTALLMENT METHOD OF REPORTING THE GAIN FROM THE
SALE.
THE SELLER DESIRES TO ARTIFICIALLY RAISE THE PRICE OF THE
PROPERTY BY OFFERING A LOWER-THAN MARKET INTEREST
RATE ON THE MORTGAGE, THEREBY CREATING MORE CAPITAL
GAINS AND LESS INTEREST OR ORDINARY INCOME
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