Holding or buying mortgage notes and want a quick way to accelerate your return?
Sure, you can’t go back to your payer/buyer and tell them to mail more money or even increase their interest rate.
Matter of fact, you purchased the note “subject to” all the terms and conditions already in place and can’t change a thing…unless the payer wants to change them!
Offer the payer to cut the interest rate in half (face rate of the note)
if they double their payment!
Let’s say the original note is:
- 240 months at 8% on a $50,000 balance with payments of $418.22
- You buy the discounted note for $40,000, which gives you a yield of 11.20%
Not bad. But what if the buyer doubles their payments to $836.44 and you cut their rate to 4%?
- First off the buyer pays off sooner….way sooner. In this case instead of 240 months, the buyer pays off in 67. That is a pretty good incentive for the payer.
- They also save big on their overall interest payment for the life of the note (about $44,518.00)
But, what about the note investor?
- The return goes UP to 12.70% (67 payments, $40K invested, payments of $836.44)
This truly is a win-win for both the payer and the note buyer. Not only did it bump up your return, you now have full use of the money to reinvest in just over five years instead of twenty! This is just one of many strategies available when calculating cash flow notes!