ROI on a New Note

5 Replies

I have an opportunity to buy and sell a mobile home. I can offer seller financing but am trying to calculate the ROI. I would be taking title to the mobile home and immediately turning it around with seller financing at the same price I buy it for. The cost will be $40,000. The note will be written for $36,000 ($4,000 down payment) at 12% for 5 years. Based on an amortization schedule, that will yield $12,048.01 interest over the 5 years. When I take that "profit" and divide it by the $36,000 "investment" and divide that by 5 "term", I come up with a 6.69% number. If my interest payment was 12% why am getting 6.69% for the ROI? Is that really my ROI on this note? I'd really appreciate input and direction if my calculation is incorrect.

@Lauren Sinz I believe I know where your miscalculation lies. 12% applies to the principal owed. As the principal gets paid down, the amount of interest payments you collect also decreases. So while you will collect close to 12% of $36,000 your first year (around 11.7%), the second year you will collect less because at the beginning of the second year your debtor now only owes about $30,000. And so on.

So you are right in your average annual ROI calculations - it's only 6.7% compared to the 12% rate on the note. However, your total ROI over the lifetime of the note is 33.5%.

You are confusing an amortized loan at 12% with an investment at 12%. Think of it this way: Your 36,000 of loan was partially paid back over the 5 year period so the principal was not a full 36,000 over the time period. If you had an investment at 12% that paid you each year 4320 times 5 years or 21,600, that would be an roi of 12%. 21,600 divided by 36,000 equals 60% divided by 5 years.

Thanks for the clear responses.  I get it now.

Agree, ROI isn't really the right tool form analyzing notes, since you have a declining principle balance, as it is beings aid back as you go. If it were interest only payments, then all priori cipher paid back at them end, est

Perhaps more importantly, make sure you are Dodd Frank compliant with these deals, of which "Lonnie deals" (Google it) like this were specifically targeted.

If you are lending you need to find out if Dodd Fran applies to your situation. If this is your only one and it is in your personal name (not an LLC) then you are probably OK but being wrong can be a disaster so stay compliant.

As far as calculating the return don't forget to take out closing costs and other expenses.  If you have a smart phone buy the 10Bii app, it's a financial calculator that works really well.

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