# Note Return Calculation

13 Replies

Hello - had a question on modeling returns on notes (Apologies in advance if this has been answered already, wasn't able to find a concrete answer in prior posts). Wanted to know what metric (or metrics) folks use when analyzing returns on performing notes?

E.g. I know folks often use a CoC % to analyze returns on rental properties, but I realize that the same methodology is likely not appropriate for notes/fixed income. I currently have a model set up with a Yield to Maturity (YTM) calculation (where I plug in the UPB as the face value of the note) and plug in my bid/purchase price as the current market price, but wanted to sanity check this with folks to see if using a YTM this way makes sense for performing notes (that I'm planning to hold)?

Thanks!

@Hamza F. I use Excel and use the XIRR function which is the yield to maturity. The reason I use XIRR vs. IRR is if the payoff was not a full year, the IRR calculates it as if it was at the end of that year. so if it was paid off in 25 months using IRR would provide return based on 36 months.

This is how i look at it -

Use a 10bii calculator to calculate your return. The values you will input on those calculators would be your UPB, number of months remaining, present payment and you calculate what your return would be. Well, i dont just stop here. That percentage means nothing if it is a low price band asset.

The other variable I would look at is the interest that you receive every month. Is that reasonable enough than the principal.

I keep a xls file on my desktop that provides future value (FV) based on current P&I payment and remaining term. I plug in what rate/return i want and it provides me my strike/offer price. For broad based return I multiply the P&I income by 12 months then divide by my desired return. Don't forget to factor in servicing fees

Thanks for your replies everyone, very helpful!

Do you factor in taxation on your spreadsheet? @Bob Malecki @Chris Seveney

If you are referring to taxation from the profits - I do not calculate that

Here's how I have mine setup, you can determine yield, APR and IRR at any point you sell in the future (formatting doesn't translate well):

Performing Note Profit Projections

Original Mortgage Balance \$ 70,000
Rate 9.0%
No. Years 15
Monthly Payment (\$709.99)

Payments remaining 179
Balance Remaining \$ 69,815.01
Note Purchase Price \$ 50,000
ITV of Balance 71.62%
APR 15.27%

Annual Yield 17.04% \$ 8,519.84
No. Payments for Return of Capital 70 mths 5.9 Yrs

Month sold/Paid Off After Purchase 12
at % UPB 75%
IRR 18.23%
Total Profit \$ 8,422.80

@Nicholas Johnson I do not factor in taxation, only direct expenses. Taxation is relative to individual tax rates and some notes I buy in my self directed, tax free IRA, others are purchased with JV partners and others are purchased for one of our private equity funds, so it's a moving target that is not easy to factor.

@Bob Malecki Do you include due diligence costs (BPO, O&E, etc) in your calculator when assessing yield for a specific deal? What about reserves for different exit strategies?

I generally want to keep about \$5K in reserve per asset until it is reperforming if a NPL. The eval I do on the note is pretty much just for projected annualized ROI while factoring in potential capital income from borrower paydown of arrears. I usually discount the P&I income by \$30/month to account for servicing fees and escrow fees. We generally want the borrower to pay \$5-10K towards their arrears to have some skin in the game for future performance, and that income lowers our cost basis for the note and boost the annualized ROI.

Originally posted by @Bob Malecki :

I generally want to keep about \$5K in reserve per asset until it is reperforming if  a NPL.

We also like that \$5k in reserves for NPNs rule of thumb Bob, its a good number and most of the time our expenses are less than that. Only in judicial states and or if we have to file for FC a second time do we go over that amount.

@Bob Malecki thanks for the reply on that. I hear you on taxation being a moving target - it's an area I'd like to understand better when it comes to note investing. It seems a self-directed IRA would be a good place to start and still reap tax benefits/protection for the novice note investor.

@Nicholas Johnson correct since the income from notes is regular income and there are no tax shelter offsetting characteristics like you would find with real property.