The biggest hurdle to get over for note investors is the problem of the discount. For the most part, the note holder has done little or no due diligence before agreeing to carry the paper. Yet they expect the note buyer to ignore underwriting the risk by paying them “full price” for the note. I even had one seller who multiplied his payment ($475.57) times the number of remaining payments (113) and insisted he deserved $53,739.41 for his note. Obviously the concept of the Time Value of Money was simple beyond his understanding.

We have reasonable success in overcoming this objection by using the following in our marketing:

WE CAN PAY YOU FULL PRICE FOR YOUR NOTE, IF YOU WILL GIVE US A TIME CONSESSION ON SOME OF THE MONEY!

If I may digress for just a minute, we use a contract with local investors and or our IRA sources that do not require any personal liability on our part. The investor looks to the underlying collateral to make him/her whole in the event of default. Email me at hdvorken@wf.net and I will be glad to send you a copy of the contract without any cost. Make the subject FREE CONTRACT.

As you no doubt know, growth inside a retirement account is either tax deferred or if it is a ROTH, it is TAX FREE for ever. Since there is no tax, IRA owners will accept lower returns. Think of the low rates on TAX FREE municipal bonds. Look at the chart below:

Yield on the Note Tax Bracket Tax Bracket Tax Bracket

10.00% 28% = 13.89% 32% = 14.71% 35% = 15.38

In other words, if income taxes are involved, the yield has to be the greater amount in order to net 10%. One note of caution even though they might except less then 10%, never sell a note for a yield less then the note rate, as there could be a problem in the event of an early pay-off.

You find the following note:

16 payments have been made on time

After a long discussion with the note seller, he admits that $37,500 would solve his problem. You offer to buy ½ of the note for ½ of the remaining payments. “I know you only need $37,500, but I’ll pay you $39,102.55. Will that be OK?”

N	I	PV	PMT	FV
112	??	39,105,22	772.02	0.0

I = 19.96

You offer an IRA a yield = to the note rate of 10.00% and they agree. You now have several choices

1. Sell all the payments to the IRA and make $16,967.92

$56,070.47 – $39,102.55 = $16,967.92

1. Keep $150 per month and make $6,073.68 up front and get $16,800 in payments over time.

Remember if you buy the note inside your own IRA, and then sell it to an investor, the profit goes NOT TO YOU, BUT YOU’RE IRA. If you buy the note and then flip it to someone else’s IRA, you can keep the cash flow and profits for yourself.

There is literally over a TRILLION Dollars in IRA’s Using these funds will make you more competitive in the note and real estate game.

Henry Dvorken

USING LEVERAGE

“OK, OK, I got it up Henry”, said my father. “Now get the long crow-bar and stick it on top of the little rock and under the big rock as far as you can”. “Good, now pull down on the end of the crowbar as much as you can”. “See it moved about 6 inches”. “Let’s rest a minute”, he said. “We only have a few more feet to get the rock in position”.

This little event took place over 62 years ago as I helped my dad position a decorative rock to be used as a focal point in a new area of his garden in our backyard in Roselle, New Jersey. As far as I know, the rock is still there. We used leverage to move the rock. (Archimedes said he could move the earth if he had a fulcrum (the little rock) and a lever long enough.) However, this article is not about using leverage to move rocks.

Let’s say you can buy a four unit rental that rents for $750.00 per unit. How much should you pay? Below is a mini operating statement for the property.

Gross Projected Income  4 x $750 x 12             $ 36,000.00

Less vacancy  (about 10%)  5 x  $750               $   3,750.00

Gross Operating Income                                   $ 32,250.00

Less Operating expenses 45% of GOI             $  14,500.00

    NET OPERATING INCOME                          $ 17,750.00

Every investor wants two things: A return on his//her money, and a return of the money. Let’s build an Investment rate of return

                        Return on the Money                                    8%

                        Return of the Money  100/ 15yrs                  6.67%

                        Total rounded                                     15%

                        Less reduction for annual appreciation        2%

                        Net rate of Investment                                  13%

Years ago I was introduced to  IRV

I

____________________________________________

R                V

Income/ Rate = Value     Income/ value = Rate       Rate x value = Income

So $17,750 ( I ) divided by .13 ( R ) = a value (V) of  $136, 550.00 (rounded). Or in other words if you paid that much cash, you could expect a return of 13% plus appreciation annually of a conservative 2%. On the other hand say you went to the bank and they agreed to lend you 80% of $136,550 ($109,250) for 18 years at 9%  (put it in your calculator, but the payment will be $1,026.00 rounded.

NOI                                                                                         $17,750

Less total of payments                                                          $12,312

CASH FLOW FROM THE INVESTMENT                                 $  5,438

$5,438 divided by $27,300 (your investment)   =            $20.0% return

You see, the use of leverage increases your rate of return. In addition if the property appreciates 2% annually (an average of $2,842) for total annual return of $8,280, your return is over 30%!!

I don’t flip notes. I use local investors for part of the money and leverage my investment. SO SHOULD YOU.

Let’s say you find this note and it is for sale

 The seller agrees to sell you the note for 85% of the present loan balance

You find an investor who will partner with you on the note by lending you $33,000 for a return of  10.5%

This means you must invest $2,051.56. You will collect the $449.75 and send the investor $393.40 leaving you $56.35

Gee you say, what’s so great about that. Wait a minute 2.70 is the monthly return x 12 equals 32.38%!!

So if you use leverage for moving rocks that’s great. But if you use it for investing in real estate or notes, YOUR INVESTMENT PORTFOLIO WILL REALLY ROCK!

PS Email me at hdvorken@wf.net and I will send you a free copy of the contract I use with local investors as an attachment to the return email.