Are Note Yields affected by the cost to maintain the note yearly?

Question

Doesn't the cost of holding a note, change the yield that's projected? (i.e. monthly servicing costs etc.)  And, if so, how do you remedy that?

Thanks for any advise.

Chris Seveney · Answer

When calculating a yield (which is a best-guess hypothetical), you will want to include all costs you may incur. One aspect I see investors make all the time is they see a $400/mo P&I payment and say "oh I am getting $400/month" - no you are not. You are paying servicing fees which reduce it to $375 +/-. You also have other costs of business like boarding costs etc. which need to be accounted for. So yes the costs do impact your yield which is why they should be included in your calculations.

Harrison Silverstein · Answer

You can use roughly $40/month to estimate the costs of holding a performing note. That's a good average (and of course if you already have a servicer in mind you can just use their figure).

Ultimately, servicing does factor in, however when you start stacking performing notes the servicing fees are pretty negligible. The servicers are worth their weight in gold.

I just hit $900/month in PN income myself and servicing fees are the last thing on my mind. Loving it!

(for context, I focused on the NPN side of notes for the first couple of years I was starting note investing. I only started picking up performing notes in 2021 after 1 of my NPNs went reperforming and another note I originated in Wisconsin... they're some of my favorite deals I have.)

Tyson Eimers · Answer

I use an average as well.  You can ask the note seller about any costs associated with the note you are buying.  Certainly your mileage may vary.  I went so far as to reach out to several servicing companies and asked for fee schedules.  They will share those with you openly.  Lastly, if you have settled on a servicer, give them a call and get a feel for what you can expect.  I've found many of them are easy to work with and glad to get on a call.

Bob E. · Answer

@Joe Daigle

You are right.  When we started doing notes sellers kept trying to tell us that we were getting x% yield with no expenses.  I wish life worked that way....

Costs you need to understand from your servicer are boarding fees, servicing costs. if there are extra costs for tax and insurance escrows, if their costs change if the loan becomes non performing, how much $$$ to send a notice of default for non performing notes, and how late fees are handled (I have seen some keep all late fees, some split them 50/50).

To calculate yields I use the 10bii app.  If you have ever used a financial calculator it's pretty simple.  Cost is $4.99 in the app store.

A few thoughts on calculating the yield given the moving parts.  For the boarding fee add that into the acquisition cost of your note, for the servicing fee deduct that from your monthly payment, put in the number of payments and it will give you the yield. Late fees and NP expenses are variable so I would not include those in your model.

If you are originating notes you can have the borrower pay the servicing fee.  I borrow private money for rehabs on our purchases and we usually offer to pay the servicing fee.  If you are buying an existing note that may or may not be part of the contract.  I do that when I borrow because I want a neutral 3rd party tracking payment history and providing me tax information at the end of the year.

A few thoughts.  I have seen some expensive servicers out there.  Some charge $25-40 to service the loan then add on fees for escrowing taxes and insurance, and increase the base rate if the loan goes delinquent, and then take the entire late fee when the borrower catches up.

Our servicer charges $18.50 a month, including escrows.  Does not increase the servicing fee if the loan becomes non performing, and splits the late fee 50/50 when the borrower does catch up.  They are not as fancy as FCI but cheaper.  Feel free to reach out if you want a referral.  BP generally frowns on that in the forums.

Joe Daigle · Answer

Thanks guys for your help.  I’m new so, I’m seeking to understand things that are common sense investing.  So bare with my ignorance.  Thanks again

Bob Malecki · Answer

Depending upon escrow parameters, you may need to factor in force placed insurance and possibly paying property taxes as well. Although these expenses can be captured and added to the payoff balance, they are direct out of pocket expenses during the life of the loan unless the borrower is paying them into escrow or you have another agreement with the borrower.

Are Note Yields affected by the cost to maintain the note yearly?

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