Want to supercharge your returns as a note investor? Try working with the purchaser to lower their interest rate, help them own the home faster, and pay less interest. Are you excited?? You should be……
At first glance, it might not seem like such a great idea, but let’s walk through how this works. I’m going to share with you exactly what I’ve done in the past with note deals. It leads to great super-charged returns!
Let’s setup our example:
Say we own a note that is worth $50,000 with an interest rate of 10% and a principle and interest payment of $500. We purchased the note for $30,000. Over the 18 years that the note takes to mature, we will collect $108,000 in payments of which the homeowner will pay us $58,000 in interest. Our total return will be 260% or 14.5% each year.
Let’s take those figures and compile them into a letter to the homeowner giving them two choices.
Option one: Cut the interest rate to 5% and increase the monthly payment to $1,000. We as the investor would collect $56,000 in payments of which the homeowner would only have to pay $6,000 in interest. In addition, the homeowner would own the home in less than 5 years. We as the investor would have a total return for 4.75 years of 86% or 18% each year.
The second option: Offer the homeowner an early cash out price. Knowing we paid $30,000 for the note, an immediate cash-out price for the homeowner of say $40,000 could get them interested. They would save $10,000 on the price of their home and you as the investor would receive a 33% return on your investment in short order.
Those are just two examples of how you can super-charge your returns in notes. The key to successfully re-characterizing the note is showing the homeowner the savings you are creating for them and keeping the letter as personal as possible. A letter with these two options could be just what the homeowner is looking for. With the power of owning a seller financed note, you can create greater value for the homeowner and increase returns for yourself. This is an advantage a bank could never provide!
I would love to hear your success stories in super-charging your note returns.