Have an existing Note and need short term cash? Looking for a short-term source of cash flow? Have limited capital but want to get into Note investing? If any of these are true, a Partial can be the solution you are looking for!!
Introduction
Most Notes investors are familiar with partials, but few have actually explored how partials can really help to build your investment portfolio. Partials can be sold from your existing Note to provide upfront cash and future cash flow. Partials can also be purchased to be tailored to meet your individual investment goals. Partials are tools that all Note investors should be familiar with and use to build an investment portfolio.
What is a Partial?
A partial of a promissory note occurs when an investor buys only a portion of the remaining payments or a specific dollar amount of an existing note, rather than the whole thing. When selling a partial, the original Note owner will sell a number of these future payments for a lump sum amount. During the Partial period, the borrower will send payments to the partial owner. When the partial period ends, the borrower will revert to sending payment back to the original Note owner. The monthly payment amount (P&I) will never change, just who receives the borrower payment.
The partial allows the original Note owner to receive upfront cash today for a set number of payments while retaining ownership of remaining future payments. The partial owner will receive a guaranteed cash flow for the number of payments purchased.
The terms of a partial can be negotiated to match the needs of the original note owner and the partial owner. The partial purchase amount, the term and the return can be modified during the creation of the partial. The only thing that cannot change is the borrower and the amount the borrower pays monthly.
Let’s work through a quick example with an existing $200,000 note at 8% for 360 months with monthly P&I payments of $1,467.53.
The partial owner has $75,000 to invest and is interested in receiving 60 months of payments. The original Note owner can sell the next 60 payments to the partial owner. During this time, the borrower will be making monthly payments to the partial owner for a total of $88,051.80 (P&I*60 payments). In this example, the partial owner will make $13,051.80 in interest over the 5 years for a total return of 6.5%, significantly greater than any bank savings rate!
Selling a Partial?
Original Note owners can sell a partial at any point during the life cycle of the Note. Most partials are sold at the beginning of the repayment period and normally have had several borrower payments (seasoning) to prove a borrower’s ability to pay.
A note owner can sell multiple partials from the same Note. For example, the original note owner could sell the first 60 payments to one partial note owner and then the next 60 payments to another. Often, the original partial owner will decide they like the monthly income and will purchase a subsequent period of payments.
The purchase price is always negotiable, but the monthly payment amount is always the same. A specific set of payments can only be sold to one partial owner at a time.
Original Note owners often sell a note to raise immediate capital that is then used to reinvest in more Notes. In this manner, the original Note owner will use the initial partial sale to leverage and grow their investment portfolio by buying more notes and then selling as a partial.
Buying a Partial?
Partial owners often are not familiar with Notes and see a partial as an easier and less risky venture into Notes. A partial is associated with an existing Note and will have a payment history that can be reviewed and analyzed. The set number of payments is much smaller than the traditional 20- or 30-year repayment term on full Notes.
Partial owners normally will have a set amount of cash and are looking for a rate of return higher than a traditional bank savings rate. The partial rate of return can be adjusted by purchase price or number of payments being purchased. These adjustments can allow the partial buyer to exactly match their required investment goals.
Recently, we are seeing older investors getting involved with partials. With a 30-year note, the end of term is a long time away. With a partial, you can tailor the investment to match your investment timeline so you can enjoy the return now and not pass along a burden to your family!
Summary
Partials are powerful tools that should be in your investment toolkit! As a Note owner, selling a partial will allow you to increase your cash reserve while maintaining a future cash stream. As a partial owner, you can enjoy the value of Note investing without a long-term commitment and can tailor the investment to match your goals! Partials are extremely powerful tools that are a “must” for your investment tool kit!
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