I am getting myself confused between Yield and ROI. For illustration purposes, lets say that we are evaluating the following note:

Original Principal Balance: $100,000

Interest Rate: 5%

Term: 360

Payment (-536.82) Calculated

Lets say that the the above note is available in the secondary market parameters as follows with10 payments made:

Unpaid Balance:  98,976

Remaining Payments: 350

As a savvy investor, I am looking to buy the balance of the payments at a discount 70% of the Unpaid balance: or $69,500

that would improve my Yield from 5.0% to 8.55% based on inputting the parameters into by HP10ii

My question is how would I arrive at ROI? And is ROI only realized once I receive a payment? So, on initial purchase my ROI is 0

If the note is performing and you plan on keeping it for cash flow, then yield is the better metric to use since it takes time into account and shows your annual return. ROI comes into play more in the case of a non-performing note that you foreclose on and then sell the property, or if you get the note re-performing and then sell the note.

One way I've seen ROI used in the "performing note held for cashflow" situation is to take the monthly payment multiplied by 12 and then divide by your purchase price. In your example, (536.82*12)/69500 = 9.27%. I'm not really sure what value this provides though.

Makes sense.  So in the case of a non-performing note would it simply be (Amount sold deducting the foreclosure and hold costs)/69500 x 100.

R Trounday
I always use yield (IRR) as my basis

Put it another way - say you own a note at 0% interest pays $500 a month with a. balance of $12,000

Say you pay $10,000 for it - after year 1 your ROI is 60% (got $6,000 of your $10,000 back) but your yield will never be close to 60%, it would be around 9-10% annual yield

It is in this range as you made $2,000 on a $10k investment which is 20% ROI over 2 years which is slightly less than 10% yield per year.

In excel calculating yield can be very lengthy formulas if you do it properly - there are shortcuts that get you close but to calculate true yield you need to input revenue and expenses by month

Thanks Chris.  Outside of servicing fees to hold the note, what expenses are you referring to since in my understanding the all the significant expenses are paid by the borrower (property tax, insurance, maintenance) for a performing note.  I can only think of loan servicing 

Now for non-performing, it could be a whole different ball game since they are not receiving any cash flow whatsoover and the lender is absorbing the cost until they can get the borrower to reperform or the lender is forced to foreclose which eats away on the ROI.

-Ray

R Trounday
Correct for performing you have services costs (and if you have company hold collateral there cost).

For non performing there are a variety of other costs involved

Originally posted by @R Trounday:

Makes sense.  So in the case of a non-performing note would it simply be (Amount sold deducting the foreclosure and hold costs)/69500 x 100.

 (Net profit / Total investment) * 100. Don't forget to deduct the acquisition cost when calculating Net Profit. 

Thanks Linda!