12 Days Of Note Investing- Day #5 Restructuring To Accelerate ROI

7 Replies

Anytime note buyers can accelerate payments on cash flow notes it creates an opportunity to increase the yield. One method is to simply go for an Early Payment With Incentive. This next example was borrowed from my husband, and to this day is still one of my favorite examples of this method.

It was late December and we were looking at a small note with a $10,000 balance. The payment was only $132.15 per month with a 10% interest rate and 120 payments left.

The note had been purchased at a discount for $6,000, which made for a 24% anticipated return.

Not bad…but we could do better! After talking to the payer we saw an opportunity to get an early payoff. They were very excited about their football team making it to the Super Bowl.

My husband's comment was, “Tell you what. If you can pay off your note, in full, before the Super Bowl, we will give you a big screen TV to watch the game.”

They did payoff the note in full and received their TV!

So here is the math…

The payer made two payments on the $10,000 note bringing the balance to $9901.96.

We purchased a big screen television for $2,000.

That means we received a NET payoff of $7,901.96.

The full payoff was made at the two-month mark so we also received two payments of $132.15 prior to the payoff.

What was the yield? It came to a 201.87% just by accelerating the payoff with an incentive.

A higher return is great but when the note pays off you now have to reinvest the funds so you want to be sure you have other equal investment options available.

If anyone wants to see the keystrokes on the financial calculator for this let me know.

I suppose you could just say hey payoff the note early and we will give you a discount... that works too.

what I have done many times.. is

and try this one.

take a long term note...  tell borrow you will cut the interest to zero in you pay me off in X months.

usually 30 or less if you have a 7 year or more term.. the PV on those sing your computer also.

plus once you do this I have NEVER had a note go bad.. they just build up equity so fast they won't stop paying..

granted you have some inputed interest to pay.. but no different than buying them a TV..

and Boy 2k for a flat screen that was one heck of a flat screen for 1k you can buy a dozy.. at least what I saw at Coscto yesterday  :)  

Wow! Thanks for sharing.

Originally posted by @Jay Hinrichs :

I suppose you could just say hey payoff the note early and we will give you a discount... that works too.

what I have done many times.. is

and try this one.

take a long term note...  tell borrow you will cut the interest to zero in you pay me off in X months.

usually 30 or less if you have a 7 year or more term.. the PV on those sing your computer also.

plus once you do this I have NEVER had a note go bad.. they just build up equity so fast they won't stop paying..

granted you have some inputed interest to pay.. but no different than buying them a TV..

and Boy 2k for a flat screen that was one heck of a flat screen for 1k you can buy a dozy.. at least what I saw at Coscto yesterday  :)  

That's a great one too.  We offer something similar with  “double the payment and cut your interest rate in half”.  Just have to run the numbers like you mentioned to find where the numbers work.

Pulled this example from the archives so definitely flat screen TVs have come down in price.  Just love the concept of getting creative depending on what the payer or the seller are really motivated by!

@Tracy Z. Rewey   were my dad and I came up with the Zero interest was in the era of 15 to 20% interest rates..

and you had I believe it was Datsun  ( Nissan to those who are too young to know what a Datsun is ) was the first auto maker to come out with 1.9% or 0% financing on their car's.

Also at the same time I had a group of Saudi buyers ( circa early 80s) who could not pay interest for religious reasons.

So just cranked up the HP and and started to get very familiar with PV's and all different calcs..

in those days we sold our owner financed land at 15% interest 7 years.. So looking to see what the PV was on those it turned out 30 months at 0 % gave it the exact same value ..

I started advertising this in the SF Chronicle and I had some banner years in those days.. LOL..

like you dusting of the ARchieves..

now when we went through 08 debacle.. and I ended up owning 200 homes IE that many notes went bad.. ( short term hard money loans).. I used the OLE zero interest to great success to sell my OREO's

and with rental income my buyers ended up getting their houses paid for in 3 to 5 years.. and that is how you make money in the rental business you get those suckers paid for.

I was able to sell at a premium to market because of owner finance and special terms.. I only sold to investors NO owner occs.. for fear of Dodd Frankenstien.

I love the note business.. we have sold over 1500 notes to our investors in the last 5 years with 2017 being our best year ever... once the investors get used to those cash flows and the way we set them up were its turn key note investing IE they don't have to hunt for ever to find them.. its pretty cool.

@Tracy Z. Rewey & @Jay Hinrichs , thanks for sharing. I am learning so many details about how the note biz works from you two and others on the forums here. Tracy, I love your daily case studies, even if I don't yet understand everything you are posting about. The detail is fantastic. And Jay, some of your posts are so good they intimidate the novice that I am. What I mean by that is I feel even more like a novice with some of the seasoned pros, like you, weighing in on various topics. I don't know squat! That said, I am excited about doing my first JV deal but have not pulled the trigger with anyone yet. Cheers!

Originally posted by @Jay Hinrichs :

@Tracy Z. Rewey  

now when we went through 08 debacle.. and I ended up owning 200 homes IE that many notes went bad.. ( short term hard money loans).. I used the OLE zero interest to great success to sell my OREO's

and with rental income my buyers ended up getting their houses paid for in 3 to 5 years.. and that is how you make money in the rental business you get those suckers paid for.

I was able to sell at a premium to market because of owner finance and special terms.. I only sold to investors NO owner occs.. for fear of Dodd Frankenstien.

I love the note business.. we have sold over 1500 notes to our investors in the last 5 years with 2017 being our best year ever... once the investors get used to those cash flows and the way we set them up were its turn key note investing IE they don't have to hunt for ever to find them.. its pretty cool.

 LOL on the Dodd Frankenstien description... Might have to borrow that one.  

What a great way to apply the 0% concept as a solution to the 08 debacle.  Hopefully we won't need that idea again soon but cycles do seem to repeat themselves.

Tracy, I love the creativity here.  I really enjoyed reading this post.  Buying a TV for a borrower is beautiful.  I appreciate the early discounted payoff approach (despite short term capital gains on the profit lowering it some).  Part of me would want the long term play but that is the beauty with notes....you win either way:)  Thanks for sharing.

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