What Exactly Is “Buy and Hold Private Money”?
Let’s define our terms clearly. When I say “private money,” I am not referring to your personal savings. In the context of investing, private money is capital lent directly to a borrower outside of the traditional banking system. The most common form you will encounter is a privately held mortgage or promissory note, often used in real estate transactions.
The “buy” part of the equation means you are purchasing the rights to that loan from the originator. You are stepping into the shoes of the bank. You become the lender. The “hold” part means you intend to keep this investment in your portfolio for its full term, collecting the monthly payments of principal and interest until the debt is satisfied. This is a stark contrast to “fix-and-flip” lending, where the goal is a quick return of capital after a short, high-risk period.
I see this strategy not as a speculative gamble, but as a methodical process of building a durable income stream. It is the financial equivalent of planting an oak tree. You do it for the shade you will enjoy decades later.
The Allure: Why This Strategy Captivates Intelligent Investors
The public markets offer liquidity and diversification, but they often lack the specific benefits that draw me to private debt.
1. Predictable, Passive Income: This is the cornerstone. Once a note is properly vetted and acquired, it generates a fixed schedule of cash flows. I know exactly what the payment will be on the 1st of every month, barring default. This predictability is incredibly powerful for retirement planning or simply for building a foundation of stable income that is disconnected from the volatility of the stock market.
2. Superior Risk-Adjusted Returns: While every investment carries risk, private notes often offer yields that are significantly higher than comparable fixed-income securities. I might target an annualized return of 8% to 12% on a well-secured first-lien mortgage. To find a similar yield in the public bond market, I would likely have to take on substantial corporate credit risk or interest rate risk. Here, the return is backed by a hard asset—real estate.
3. Inflation Hedging: Most private mortgages are structured with fixed interest rates. While this seems like a negative in a rising-rate environment, it can be a hedge against inflation over the very long term. I am locked into a yield that I deemed attractive at the time of purchase. If inflation surges, I am being repaid with dollars that are worth less, but my fixed return remains the same. However, the key is that the return was high enough initially to compensate for this future risk. Furthermore, the underlying collateral—real estate—historically appreciates in value over time, providing an additional, implicit layer of protection.
4. Control and Transparency: I cannot open the books of a publicly traded company whenever I wish. With a private note, I have direct access to the entire deal file: the appraisal, the title insurance, the insurance policy, the borrower’s credit report, and the property itself. This level of transparency is unparalleled. The control comes from my ability to directly service the loan or hire a competent servicer, to work with the borrower if they face hardship, and to initiate foreclosure proceedings if necessary. My fate is in my hands, not those of a distant corporate board.
The Anatomy of a Private Note: What Are You Actually Buying?
Before you can hold an asset, you must understand its components. A private note is not a monolithic block; it is a bundle of rights and risks defined by its key terms:
- Principal Balance: The original amount lent, which is gradually paid down over time.
- Interest Rate: The annual cost of borrowing, expressed as a percentage of the outstanding principal.
- Monthly Payment: The constant amount paid by the borrower each month, which consists of both interest and principal.
- Amortization Period: The total length of time it would take to pay off the loan completely with regular payments (e.g., 30 years).
- Term/Balloon Date: Many private notes are not fully amortizing. They have a shorter term (e.g., 5 years) after which the remaining principal balance—the “balloon payment”—is due in full.
- Lien Position: This is paramount. A first-lien position means your debt has priority over all other claims on the property in the event of a foreclosure. A second-lien position is subordinate to the first; it carries significantly more risk and must offer a much higher yield to be compelling.
When I analyze a note, I am not just looking at these numbers in isolation. I am assessing the story they tell about the risk and return profile of the investment.
The Crucial Process: Underwriting the Note and the Collateral
Buying and holding private money is an exercise in rigorous due diligence. The mantra “garbage in, garbage out” has never been more relevant. My process involves a two-part analysis: the note itself and the property that secures it.
Part 1: Underwriting the Borrower and the Note’s Terms
I start with the people behind the promise. I review their credit history, but I place more weight on their equity in the property and their payment history on this specific note. A perfect credit score is less important to me than a flawless 24-month payment history on the loan I’m buying.
Next, I break down the note’s financial mechanics. Let’s take a concrete example.
Assume I am considering purchasing a note with the following terms:
- Unpaid Principal Balance (UPB): \text{\$85,000}
- Interest Rate: 7.5\%
- Remaining Term: 28\ \text{years} (336 months)
- Monthly Payment (P&I): \text{\$594.33} (This is calculated using the standard amortization formula, but for analysis, we take it as a given from the note documents).
My first calculation is always the Yield to Maturity (YTM), which is the annualized rate of return I will earn if I hold the note until it is paid off, assuming all payments are made on time. Since I am buying the note for a price that may not be the full UPB, this is critical.
If I purchase the note for its full \text{\$85,000} UPB, my YTM is simply the 7.5\% interest rate. But the market rarely works that way. Notes are often sold at a discount to compensate the buyer for perceived risk or market conditions.
Scenario 1: Purchasing at a Discount
Suppose the seller agrees to a price of \text{\$80,000} for this \text{\$85,000} note. I am immediately recognizing \text{\$5,000} in “instant equity.” My yield is now higher than the stated 7.5\% because I invested less to receive the same stream of payments. Calculating the exact YTM requires a financial calculator or spreadsheet IRR function, but the concept is clear: discount enhances return.
Scenario 2: Purchasing at a Premium
Conversely, if the note is highly desirable (e.g., a very low loan-to-value ratio), I might pay a premium, say \text{\$86,000}. This would lower my effective yield below 7.5\%.
Part 2: Underwriting the Real Estate Collateral
This is where I spend most of my time. The property is my ultimate safety net. My analysis is rooted in one key metric: the Loan-to-Value Ratio (LTV).
\text{LTV} = \frac{\text{Unpaid Principal Balance}}{\text{Current As-Is Property Value}} \times 100I never rely on the original appraisal. I require a Broker’s Price Opinion (BPO) or a new appraisal to establish a current value. Let’s continue our example.
- Unpaid Principal Balance (UPB): \text{\$85,000}
- Current Property Value (from BPO): \text{\$135,000}
A 63% LTV is exceptionally strong. It means the property value could fall by over 35% before my loan is underwater. This is the kind of margin of safety I insist on for a buy-and-hold investment. I am generally cautious of anything above 75% LTV for a first-lien position in a buy-and-hold context.
I also assess the property type (single-family residential is most common), its condition, and the broader neighborhood and economic trends affecting its value. A note secured by a property in a declining rural area is riskier than one in a stable suburban market, even with a similar LTV.
Sourcing Opportunities: Where to Find Notes to Hold
You cannot hold what you cannot find. The market for private notes is opaque; it thrives on relationships and knowledge, not public listings.
- Note Brokers: These are intermediaries who represent sellers (often individual “mom-and-pop” note holders) and connect them with buyers like me. They charge a fee, but they provide access to a flow of vetted opportunities.
- Local Real Estate Investor Associations (REIAs): This is my preferred hunting ground. Attending meetings allows me to network with potential sellers directly. I often meet investors who did a seller-financed sale years ago and now want a lump sum of cash instead of waiting for monthly payments.
- Direct Marketing: I have had success by sending targeted, professional letters to owners of properties that are listed as “free and clear” of debt in county records. These individuals may be open to selling a note if they were to finance the sale of their property.
- Online Marketplaces: Websites like Paperstac and NoteXpress have emerged to bring liquidity to this market. They can be useful, but the best deals are often found off-market, away from competitive bidding.
The Hidden Risks: What Keeps Me Awake at Night
No investment is without risk. Acknowledging and mitigating these risks is the essence of a successful hold strategy.
- Default Risk: The borrower stops paying. This is the most obvious risk. My mitigation is rigorous upfront underwriting (strong LTV, solid borrower history) and having a clear, calm process for handling defaults, which may lead to a loan modification or, ultimately, foreclosure.
- Illiquidity Risk: You cannot click a button to sell a private note. Exiting the investment before its term requires finding another buyer, which takes time and may necessitate selling at a discount. I only allocate capital to this strategy that I am certain I will not need for the duration of the note’s term.
- Servicing Risk: Who collects the payments, handles the escrow for taxes and insurance, and communicates with the borrower? If I service the loan myself, I risk errors. If I hire a third-party servicer (which I often do for a fee of 0.25\% to 0.50\% of the loan balance per year), I must vet them thoroughly. A poor servicer can ruin a good note by alienating the borrower.
- Prepayment Risk: The borrower may decide to refinance or sell the property and pay off the loan early. This seems like a good thing—I get my capital back—but it truncates my income stream. I lose all those future interest payments. To model this, I calculate the Weighted Average Life (WAL) of the investment, but in practice, I mitigate this by focusing on notes where prepayment is less likely (e.g., borrowers with less-than-perfect credit who cannot easily qualify for a bank refinance).
A Portfolio Approach: Building a Mosaic of Income
I do not buy a single note and call it a strategy. I build a portfolio. The goal is to spread risk across different geographies, property types, and borrower profiles. This is how I smooth out the inevitable bumps in the road.
Imagine constructing a portfolio of ten notes, each with a \text{\$100,000} balance and an average yield of 9\%.
| Metric | Single Note | 10-Note Portfolio |
|---|---|---|
| Total Capital Invested | \text{\$100,000} | \text{\$1,000,000} |
| Estimated Annual Income | \text{\$9,000} | \text{\$90,000} |
| Impact of One Default | Catastrophic (100% loss of that income) | Manageable (10% loss of income) |
| Diversification Benefit | None | Significant |
This diversification does not eliminate risk, but it makes it manageable. The income from the nine performing notes covers the cost of working through the default on the tenth.
The Endgame: Holding, Managing, and potentially Exiting
The “hold” period is active, not passive. It requires ongoing management.
- Payment Processing: Ensuring payments are received, recorded, and deposited promptly.
- Escrow Management: Verifying that property taxes and insurance are paid on time to protect my collateral.
- Borrower Communication: Maintaining a professional, cordial relationship with the borrower. A happy borrower is a paying borrower.
- Annual Reviews: I pull a new BPO every few years to monitor the LTV. As the principal is paid down and the property (hopefully) appreciates, the LTV improves, making my investment safer and more valuable if I choose to sell it.
And selling is always an option. The exit strategies are:
- Hold to Maturity: Collect all payments until the loan is paid off.
- Partial Sale: Sell a portion of the payment stream for a lump sum (e.g., sell the next 60 payments to another investor).
- Full Sale: Sell the entire note to another investor, often at a price that reflects the improved LTV and payment history, potentially locking in a gain.
Conclusion: Is This Strategy for You?
Buying and holding private money is not a path to instant wealth. It is a slow, deliberate strategy for building lasting financial security. It suits a specific type of investor: one who is patient, detail-oriented, and comfortable with illiquidity. It requires a willingness to do the hard work of due diligence or to pay experts to help you do it.
For me, it represents a cornerstone of a balanced portfolio. It provides an income stream that is resilient to stock market crashes and economic cycles, backed by the enduring value of real estate. It is a way to participate in the wealth-building of others while securing my own financial future, one monthly payment at a time. In a world of digital noise and fleeting trends, the tangible, predictable nature of a well-underwritten private note offers a quiet, powerful form of financial clarity.
