Recently a private note investor contacted us to get some guidance on calculating a yield on a note they were buying. While payments were current there was a past due balloon they were looking to extend along with an additional advance.
This is a creative workout solution to a common balloon problem and the investor kindly agreed to let us share it here with our readers.
The Question on Calculating Yield:
I mainly broker hard money loans and buy existing notes, but this one deal has me confused and I need you to please help figure out the keystrokes on my HP12C.
A seller sold a property holding a purchase money mortgage for $110,000.00 in 2006. It was amortized for 15 years at 10.75% with a 5-year balloon. Neither the mortgagor nor the mortgagee paid attention to the balloon and the mortgage continued.
The mortgagee offered to sell the note at a discount. The mortgage is current and the September 2013 payment has been made. In order to make me feel comfortable with the collateral, I insisted that the mortgagor add another parcel they owned as additional collateral. They agreed but only if I advanced an additional $5,000.00. There are closing costs included so ultimately the payer will be signing a new note for $83,000.00.
The note rate will remain the same but we are now amortizing the $83,000.00 over 200 months with a balloon due September 1, 2018 with the new payment starting October 1, 2013. I do not know how to figure out my yield. The additional advance is throwing me off.
Below are the basic facts:
- Original Loan- $110,000.00
- Rate- 10.75%
- Amortized – 15 years with a five-year balloon
- Payment – $1,233.04
- Balloon Date – February 1, 2011
- Current principal balance aft 91 payments – $75,407.57
- Next payment due – October 1, 2013
The note is being modified to the following terms:
- New Note Amount- $83,000.00
- Rate – 10.75%
- Amortized- 200 months with a 5-year balloon
- New payment $893.70
- Balloon Due – September 1, 2018
Although the current principal balance is $75,407.57 ($83,000 after modification) my client is only investing $67,000.00 for the mortgage. My problem is that I do not know how to figure out what my client’s yield is. Although you may be able to help me figure out the yield, more importantly I would like to know the individual keystrokes involved so I can calculate on future deals.
Thanks again for agreeing to assist with this calculation.
Private Note Investor
Making The Calculations
When I was at the insurance company buying notes there was an HP12C “wizard” that taught me the financial calculator. He said to always reduce it down to the money you will receive (the cash flow) then calculate for yield.
So on this deal I put the following in the HP12C Financial Calculator:
- 83,000 CHS PV
- 10.75 G I
- 893.70 PMT
- 60 N
- Solve for FV = 71,138.80
Now that the cash flow is established we can replace PV with the investment amount of $67,000:
- 67,000 CHS PV
- Solve for I = 1.40
- x by 12 to get an annual yield = 16.8%
I come up with 16.8% yield assuming the balloon is made. I always run a worse case scenario assuming the balloon is not paid and that the note needs extended at the same monthly payment and rate. In that case the yield would be 14.58%. That calculation looks as follows:
- 67,000 CHS PV
- 200 N
- 893.70 PMT
- Solve for I = 1.21
- X by 12 to get an annual yield = 14.58%
There are more complicated ways to run this based on the old note, the advance, expenses, etc. but this is an easy straightforward way to look at the deal. I assumed the $67,000 investment included the note investment amount, advance, and any expenses. It’s important to mention the calculations would change if it was really 67,000 PLUS the 5,000 advance and expenses being invested. If someone wants to see it on paper I find that the T-Value software program is a great tool that matches the HP12C to the penny.
You can also get step-by-step video tutorials in our new How To Calculate Cash Flows Online Training!
The Disclaimer: I must add that I can’t provide tax, legal, or investment advice and encourage you to seek the assistance of competent counsel should you need those services. I’m just sharing my personal experience of how I would look at the deal if I were buying it for my own purposes.