What Are Cash Flow Notes?

Cash flow notes come in many forms and formats but all have one unique characteristic and principle. All notes are a promise to pay. Almost everyone has entered into an agreement to purchase something and pay for it over a set period of time. For example, when someone buys a new car, they will give the seller a down payment and sign a contract(this is a note) to pay for the car in monthly installments at an agreed upon interest rate. Once the buyer has met his obligation of paying for the car over the life of the note, the car is now the property of the buyer.

This example can be applied to anything from furniture to multi-million dollar real estate transactions. Whenever a contract is signed to pay for something over a set period of time, this process creates cash flow notes. These transaction are not always between a buyer and a commercial entity such as a bank or lending institution. Often these transactions take place between a buyer and private individuals, whereas these private individuals act in the same capacity as a bank or lender.

Real estate transactions are probably the most common form of cash flow notes between a buyer and a private individual. Many individuals may own homes they have placed on the market and provide the financing for a buyer rather than a commercial lender. In this case, the buyer would pay the monthly note to the original owner of the house. Once the contract or note is agreed upon by both the buyer and seller, the seller has now created a cash flow stream that pays him every month for the life of the note, or until the mortgage is paid in full.

Real estate is just one example of cash flow streams that can be generated to create a monthly income for private individuals and investors. In following post, we will discuss other contracts and transactions that are also cash flow notes and income streams.

No comments: