When buying real estate notes you will surely encounter a seller that flat-out refuses to take a discount. You can try explaining the time value of money until you turn blue in the face or… provide a simple alternative.
Offer to buy half the number of remaining payments for half the balance.
Not only is the seller happy, the investor can receive an increased yield.
Intrigued? Wondering how this all works? Watch this step-by-step video walk through of the 50-50 Partial from our How To Calculate Cash Flows Training.
The 50/50 Partial Investment Example
Let’s use a classic example of a $100,000 note at 10% with 360 payments of $877.57 per month.
Start by taking the remaining balance of $100,000 and dividing by 2 to get $50,000.
Next take half of the remaining number of payments (360 divided by 2) to get 180.
The Amount Offered to the seller would be $50,000 for the next 180 payments.
Sounds good for the seller but what is the investor’s return?
Calculating Yield On The Partial Cash Flow
For this we turn to a financial calculator and enter the following values:
The anticipated yield is 19.98% (or 1.665 x 12 if you are using the HP12C financial calculator). The face rate of the note remains 10% but the investment yield is almost double!
How About A 25/25 Partial Investment?
This concept also works when dividing a note into thirds or quarters. Let’s take the same $100,000 note and structure buying 1/4 of the remaining payments for 1/4 of the balance.
- Balance Remaining: $100,000 ÷ 4 = $25,000
- Payments Remaining: 360 ÷ 4 = 90
- Amount Offered: Purchase the next 90 payments for a 25,000 investment.
What happens to the yield?
The anticipated yield goes up to a whopping 39.91% (or 3.325 x 12 if you are using the HP12C financial calculator).
Where’s The Discount?
This strategy is also referred to as a split funding, the no discount partial, or half the payments for twice the yield.
Technically of course the cash flow is being purchased at a discount from the face rate of the note. But to understand that it takes knowing how to calculate the time value of money (and now we’ve arrived full circle from the beginning of the article).
Ready to master the financial calculator for maximum profits? Check out our How To Calculate Cash Flows Training for over 50 step by step videos like the one shared here!
This information is provided for educational purposes only. The author and publisher are not soliciting investment funds and this is not intended as legal, financial, or tax advice. This investment strategy might not be suitable for your situation. Always consult with a competent attorney, financial advisor, and/or tax accountant for your protection.