It was a typical phone call, “I understand you purchase land contracts notes?” I replied, “Absolutely! What can you tell me about the terms of the note?” The response I got was one I was well prepared for, and you should be too. “Well, the note is for 10 years, with a $25,000 balance, payments are $403.34 a month”. I didn’t have to ask what the interest rate is because I know how to calculate it….. 15%. Learning how to calculate missing information can give you a leg up on everyone else when it comes to buying notes. I created an easy to use Excel spreadsheet here that you can use to calculate missing values of a note.
Using the Excel spreadsheet or not, remember the four components that are key to determining what the note is worth. These four components are also your starting point for determining how much you can pay for the note.
Number of Payments (N): Tells you how many payments in the note you can expect to receive based on the other variables provided. If expressed in years, you must multiply by 12.
Interest Rate (I): Gives the effective interest rate on the note. One thing to remember when calculating interest rates, always divide the interest rate by 12. (For each month of the year)
Payment (PMT): Identifies the current monthly payment you can expect to receive of principle and interest over the life of the note.
Present Value (PV): The present value of the note based on a series of future payments.
Once you know these four components, you can start analysis to determine how much you can afford to pay when purchasing the note. You can also determine what your rate of return will be. Next week, we will use this framework to calculate how much we can pay for the note based on the four components and our own expected rate of return.
Photo Credit: Horia Varlan
Related posts:
- Seller Financed Notes: Finding a Diamond in the Rough
- Buying Notes at a Discount: Perfect for Real Estate Investors with Cash
- For Real Estate Investors, Finding Good Loans Is Tougher Than Finding Good Deals
- Seller Financing: Pros and Cons
- Finding Happiness with Contractors
Article Author: Kevin KaczmarekKevin has written 42 articles for us.
Visit Kevin's Website: http://www.capitalblueprints.com
Kevin Kaczmarek is President of Capital Blueprints, LLC. Serving a national and international client base, Kevin helps clients achieve their personal goals for long-term stability and solid financial growth through Self Directed IRA Investments and individualized Passive Income Strategies.
Joshua Dorkin
{ 5 comments… read them below or add one }
Great article and easy to use spreadsheet.
We’ve used partial purchases to get some of our investors their money back quick for new deals that offer higher interest rates. That would be a great follow up article for note investors who haven’t ventured into partials or assignments yet.
This spreadsheet is a godsend to people like me. Math isn’t exactly my strong suite. I really could use some more easy methods such as these for calculating expenses.
Thanks Craig and Emmanuel!
@Craig. I will definitely do a topic on partials. Partials are probably my single favorite ways to work with notes.
@Emmanuel, email me and lets talk. I will see what I can do to help.
Great simple article with a great spreadsheet! Bravo! Thanks for the contribution, Kevin!
great post! thanks for taking something so daunting and simplifying the heck out of it.