Consultant · Phoenix, AZ · Member since 2017 · 152 posts · 23 votes
I am brokering notes similar to this one. This one is available. The seller will not discount. I'd like feedback please. How do you figure out if it's a good investment ?
Performing Note Kansas City MO Price $25,200 Selling 138 payments Buyback Option After 60 Months Value $140,000 Current balance $35,687 Original balance $37,000 P & I $324.70 Original term 360 Remaining term 297 Investment to value 26% Loan to value 36% Interest rate 10% Effective yield 10.35% Seasoning-Stellar - 53 Months Dodd Frank N/A 08/14/2012 Projected rent $947
Rockledge, FL · Member since 2016 · 493 posts · 427 votes
9y
Daryl,
The way to go about this is to calculate both an NPV and an IRR. The NPV is the Net Present Value of an income stream, discounted to the cost of capital (or required rate of return) and the IRR sets the NPV function = 0 to get a rate of return. If NPV is +, then the investment will return more than your required rate of return, if - then it doesn't. If IRR is greater than required rate of return, then indications are buy, otherwise, if IRR is less than required rate of return, then pass.
Given that most hard money lenders are at least 10% if not more like 12-15% that should be your target for a return. After all, you could place your money with them, and make that return, or close to it. So, my required rate of return is 12%. Lets see how we do.
Period
Payment
0
-$25,200.00
1
$3,896.40
2
$3,896.40
3
$3,896.40
4
$3,896.40
5
$3,896.40
6
$3,896.40
7
$3,896.40
8
$3,896.40
9
$3,896.40
10
$3,896.40
11
$3,896.40
12
$1,948.20
IRR
10.6040%
NPV @ 12%
-$1,396.69
RutRo! My IRR is at 10.60% and I need 12% so, no go, and my NPV is negative, meaning that it's a looser. Note that I annualized this to make it fit, as well as make my life easier. It wouldn't change if I used the $324.70 and went for 138 payments. The -$25,200 is the payment for the note, and the $3896.40 is 12*$324.70. Easy to do on a spreadsheet. I would suspect the note buyers would have a required rate of return for this approaching 18% or so. If I'm wrong, I hope they correct me.
So there you have it. I would pass, mostly because my required rate of return is not met, and furthermore, it's going to cost me money to do my due diligence on the loan, and that means more than $25,200 out the door. For the same effort, I could have a $250,000 note, with better characteristics.
I'm sure that Jay Hinrichs, Don Konipol, or Bob Malecki or any of the other note guys here could poke some holes in this, but it should be in the ballpark of correct.
Rockledge, FL · Member since 2016 · 493 posts · 427 votes
9y
Daryl,
The way to go about this is to calculate both an NPV and an IRR. The NPV is the Net Present Value of an income stream, discounted to the cost of capital (or required rate of return) and the IRR sets the NPV function = 0 to get a rate of return. If NPV is +, then the investment will return more than your required rate of return, if - then it doesn't. If IRR is greater than required rate of return, then indications are buy, otherwise, if IRR is less than required rate of return, then pass.
Given that most hard money lenders are at least 10% if not more like 12-15% that should be your target for a return. After all, you could place your money with them, and make that return, or close to it. So, my required rate of return is 12%. Lets see how we do.
Period
Payment
0
-$25,200.00
1
$3,896.40
2
$3,896.40
3
$3,896.40
4
$3,896.40
5
$3,896.40
6
$3,896.40
7
$3,896.40
8
$3,896.40
9
$3,896.40
10
$3,896.40
11
$3,896.40
12
$1,948.20
IRR
10.6040%
NPV @ 12%
-$1,396.69
RutRo! My IRR is at 10.60% and I need 12% so, no go, and my NPV is negative, meaning that it's a looser. Note that I annualized this to make it fit, as well as make my life easier. It wouldn't change if I used the $324.70 and went for 138 payments. The -$25,200 is the payment for the note, and the $3896.40 is 12*$324.70. Easy to do on a spreadsheet. I would suspect the note buyers would have a required rate of return for this approaching 18% or so. If I'm wrong, I hope they correct me.
So there you have it. I would pass, mostly because my required rate of return is not met, and furthermore, it's going to cost me money to do my due diligence on the loan, and that means more than $25,200 out the door. For the same effort, I could have a $250,000 note, with better characteristics.
I'm sure that Jay Hinrichs, Don Konipol, or Bob Malecki or any of the other note guys here could poke some holes in this, but it should be in the ballpark of correct.
Consultant · Phoenix, AZ · Member since 2017 · 152 posts · 23 votes
9y
MI
River Rouge
Present value $37,000
Total cost $12,000
LTV 32%
Interest rate 15%
24 pmts $581.84
My calculator doesn't have what you are saying. How would this one figure?
Rockledge, FL · Member since 2016 · 493 posts · 427 votes
9y
@Gail Greenberg, it's being done in a spreadsheet, You could do it by hand...
NPV=R*(1-(1+i)^n/i )- initial investment
In the above formula, R is the net cash inflow expected to be received in each period; i is the required rate of return per period; n are the number of periods during which the project is expected to operate and generate cash inflows.
But most folks use the spreadsheet to make life easier (see below)
@Account Closed, see if using a spreadsheet makes it a bit more clear. if you NPV is different you are probably using a different discount rate, so check that. You could also be using a different number of payments. 138 is 11.5 years, so I just went into the 12th year at half the cash flow. Also, remember this is a partial, not a whole loan, the seller is keeping a tail. They are selling 138 payments out of the remaining 307.
Period
Payment
Type
Name
Syntax
Description
0
-$25,200.00
Financial
NPV
NPV(discount, cashflow1, [cashflow2])
Calculates the net present value of an investment based on a series of periodic cash flows and a discount rate
1
$3,896.40
Financial
IRR
IRR(cashflow_amounts, [rate_guess])
Calculates the internal rate of return on an investment based on a series of periodic cash flows.
Rental Property Investor · Stockdale, TX · Member since 2017 · 284 posts · 202 votes
9y
No offense meant, but if you have to ask if it's a good investment, perhaps you need to spend some more time educating yourself before trying to broker notes.
Flipper/Rehabber · Kansas City, MO · Member since 2011 · 2k+ posts · 712 votes
9y
So you analyze the deal, just like an investment.
So when the note was created, is there good paper for it? Original promissory note and mortgage or deed of trust. Assignment of Rents for it. Are all the right docs recorded? Is it a valid loan.
Next what is the value of the property compared to the note. If the borrower stopped paying and you had to foreclose, what would foreclose away, what would be left for you to take on like taxes and utility liens, how long will that take and what would it costs - weigh those numbers with the cost of the note.
Next, is the borrower. Look at his loan application for the note, look at his credit report from the time the note was created and a current credit report. What does that look like.
Interest Rate, last if the seller is selling at face value, are you ok with the interest rate being paid and keep in mind you will probably be paying a servicer out of that monthly payment - my servicer charges $18.50 a payment. So if back that out of each payment to get your new interest rate and if that is not enough return, keep connecting with this note seller, he may reduce his price sometime in the future, and then again, he may not . . so keep fishing.