The last newsletter I provided you with two examples and on one of them I gave you the wrong answer! I messed up! Oops! Forgive Me! Mea Culpa!
Here was the challenge (it was just the second one):
1) I buy notes. It’s my business. If the seller of the house needed to sell that note after having received five years of payments, what would I pay for it if I wanted to get 10% on my money?
How many payments have been made on the note after five years? And how many payments remain?
Answer: 5 years X 12 payments/year = 60 payments have been made
360 total payments – 60 payments made = 300 payments remaining
Now we know how many payments are remaining (N), the interest rate I wish to earn (I), the monthly payment amount (PMT) and the balloon amount (FV)? Knowing these four things I can determine how much I am willing to pay TODAY for this note:
N = 300 (payments remaining)
I = 10% (what I want to earn on my money)
PV = ? (what I’m willing to pay for the note TODAY)
PMT = 1,073.64 (notice the plus sign; I will RECEIVE these payments)
FV = 0 (it’s a fully amortized note)
(After 300 payments there is a zero balance remaining. _ Chief Messer Upper)
Answer: PV = -118,151.47
I am willing to pay $118,151.47 to purchase this note and receive 300 payments of $1,073.64.
What if I purchased the note for $118,151.47 in order to receive 300 payments and the note was paid off after only 60 payments? What would my yield be then?
N = 60 (payments I will receive)
I = ?
PV = -118,151.47 (that’s what I paid for the note)
PMT = 1073.64 (positive because I will RECEIVE these payments
FV = 162,684.13 (Now we can use the answer from the first challenge which is
POSITIVE because we will be receiving it as the payoff from the payor)
Answer: I = 15.89%
That’s a little better than the 10% I expected. Why is higher than 10%? Because we’re receiving our investment plus interest, plus the discount on the note purchase much sooner than expected.
See the value of checking your work?
And only Carl Salzman contacted me and questioned me about my goof. I’m sending Carl a gift as a thank you and a humbling reminder, “always check your work!!!”
This is just one of the many ways a financial calculator can help you in your business. And here’s to you having lots of business to use it.
The Sandwich Lease
And here’s one of my favorite techniques, the sandwich lease.
This technique involves two leases on the same property. It offers cash flow along with possible long-term benefits. First, you obtain a long-term lease with FLAT RENT and the right to sublease. Then, if you don’t want to live in it, you make it an investment by subleasing (or subleasing with an option) it to someone else. Subleasing a property to someone else is called a Sandwich lease.
Sublease for MORE than you’re paying in rent thereby generating positive cash flow. If you combine your lease on the property with an option to purchase later, you can sell it later for a profit (or walk away). You can sell the property to your sub-tenant or anyone else. Combining the lease/option strategy with the Sandwich lease strategy can give you current cash flow and future profits with minimum risk.
Benefits to the OWNER:
1. They get tax benefits by turning the property into a rental.
2. It eliminates their management problems.
3. They can resume their own life immediately.
Benefits to ENTREPRENEUR
1. Positive cash flow due to your property management skills.
2. Win the confidence of the owner.
3. Through a successful LEASE, you can arrange to purchase the property later with favorable terms because you’ve already proven yourself to be trustworthy.
I hope to see you around at meetings or possibly in one of my creative financing or calculator classes.
Happy Holidays! Mele Kalikimaka a Meka Hauoli Makahiki Hou!
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