Supercharge your Land Contract Returns
Want to supercharge your returns as a note investor? Try working with the purchaser to lower their interest rate, help them own the home faster, and pay less interest. Are you excited?? You should be……
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At first glance, it might not seem like such a great idea, but let’s walk through how this works. I’m going to share with you exactly what I’ve done in the past with note deals. It leads to great super-charged returns!
Let’s setup our example:
Say we own a note that is worth $50,000 with an interest rate of 10% and a principle and interest payment of $500. We purchased the note for $30,000. Over the 18 years that the note takes to mature, we will collect $108,000 in payments of which the homeowner will pay us $58,000 in interest. Our total return will be 260% or 14.5% each year.
Let’s take those figures and compile them into a letter to the homeowner giving them two choices.
Option one: Cut the interest rate to 5% and increase the monthly payment to $1,000. We as the investor would collect $56,000 in payments of which the homeowner would only have to pay $6,000 in interest. In addition, the homeowner would own the home in less than 5 years. We as the investor would have a total return for 4.75 years of 86% or 18% each year.
The second option: Offer the homeowner an early cash out price. Knowing we paid $30,000 for the note, an immediate cash-out price for the homeowner of say $40,000 could get them interested. They would save $10,000 on the price of their home and you as the investor would receive a 33% return on your investment in short order.
Those are just two examples of how you can super-charge your returns in notes. The key to successfully re-characterizing the note is showing the homeowner the savings you are creating for them and keeping the letter as personal as possible. A letter with these two options could be just what the homeowner is looking for. With the power of owning a seller financed note, you can create greater value for the homeowner and increase returns for yourself. This is an advantage a bank could never provide!
I would love to hear your success stories in super-charging your note returns.