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