New to the forum and the note investing world..
I'm looking into building my excel template for analyzing IRRs of performing (1'st lien) note investments
Can you please elaborate on the costs associated with buying the note, maintaining it through its life time and eventually when deciding to sell the note or when the mortgagor refinances or pays of the debt?
The costs are limited when the note is performing. The main cost is servicing which will be $15-30 /month depending on whether they're collecting money in escrow for taxes.
You're going to have a small setup fee with the servicer, a small fee from your document custodian for review and recording your assignment of mortgage (lower if you do it yourself).
To be honest a spreadsheet to analyze performing notes is overkill. There's just not a lot of variables to account for. I use an app on my phone ("Financial Calculators") most of the time to calculate TMV.
The benefit of using an open input model like excel is that you can adjust prepayment levels of the loan which if the loan is purchased at a discount will have a direct impact on your IRR. That said, as Patrick points out, most of the time you can solve for rate using a financial calculator which will be a representation of the anticipated yield. Though I would not call it overkill if you use that excel model to input a more finite and accurate set of costs. If you simply want a ballpark figure, then the calculator works fine.
Keep in mind delinquency will adjust your monthly servicing fee. Loans which remain current have the lowest servicing cost. As loans dip into delinquency the cost of servicing goes up though the cost itself is somewhat servicer dependent. A performing loan will cost you between $15 to $25 per loan per period. Escrow accounting services can usually add around $15 to $30 in additional costs of servicing. A 30 day delinquency can raise the per period servicing cost $40 to $60 (not including escrow). A loan at or exceeding 90 days past due will be considered in default and can cost $75 to $100 per month (not including escrow).
Any due diligence will be costs that immediately increase your cost basis. Property evaluation and title review are some pretty straight forward costs. Having a file reviewed by a third party can increase costs. Or there can also be features in the file which demand future capitalization by the new investor which may or may not be offset like purchasing a loan in forbearance as a trial modification.
Many fees will be specific to the servicer and file. Those fees can vary widely. There may be increases in periodic servicing fee depending on specific programs or incentives which the file participates in like certain modification programs. These correlate to the administrative demands on the servicer on behalf of the mortgagee for the file. As such, servicers have their own set of servicing fees which relate to the array of administration and activities on any given loan. (too many to name) See your servicing contract for more information on fees charged.
Custodial fees are not really fees a street level investor should have as a burden. Custodians are more for institutional investors and they charge a per file and sometimes per retrieval fee. I would suggest get yourself a fire proof safe and simply store your own file. Most of the institutional custodians won't take on an account for less than a large number (100+) loans. To some extent the custodial structure has played a role in the erosion of file contents. Something to also bear in mind.
Hi Patrick and Dion,
Thank you both very much for the detailed and thoughtful answers!
after reading, i think i agree with not needing an excel for performers, but i would probably still build one just to see how the costs interact with the final IRR under various scenarios