Methods of Calculating Note Investing Returns

Different Methods of Calculating Note Investing Returns

ROI VS Yield

Yield VS IRR

What is the Difference between IRR and Yield and ROI?

We start off by stating telling you why we are Skipping the method of Bidding on a Note based on Percentage of UPB.  Although this method is easy to calculate, it is dangerous.  This equation of UPB*(percentage) does not take into account different Interest rates or Terms.  We discuss how your return changes if you bid two notes the same way but each note has a different Interest Rates and/or Terms in this Youtube Video.  If you want more assistance after reading this blog be sure to sign up for our Financial Calculator Training or reach out for Note Consulting.

The Different Calcuation Methods Note Investing Returns

• ROI
• Yield
• IRR

Calculating Note Investing Returns #1

 Return on Investment (ROI)

ROI measures the total return of an investment relative to the cost of the investment. It includes all the returns from an investment, such as capital gains, dividends, and interest, then subtracting the cost of the investment, then dividing the total by the cost of the investment.. It’s a simple, universal metric that doesn’t consider the time value of money or the holding period.  Therefore, ROI could be used to compare the return of investments with different time frames, but it’s less suitable for annualized returns comparisons.

The formula for ROI is:

ROI = (Current Value of Investment – Cost of Investment) / Cost of Investment

It’s typically expressed as a percentage, and can be used to compare the efficiency of different investments.

Note Return Value:  Poor

ROI Pro: Simple calculation

ROI Con:  Does not Consider Time Value or how long the asset is held for.  Not good measurement for Note Investing

Calculating Note Investing Returns #2

Yield (Yield to Maturity)

Yield specifically measures the income (interest or dividends) generated by an investment in a particular period relative to its cost. It’s typically used for income-generating assets and is calculated on an annual basis.

Yield can be considered a static measure because it doesn’t consider the time value of money or the fact that cash flows can change over the life of the investment.

The formula for Yield is:

Yield = Income generated from investment in a given period / Price or cost of the investment

It’s also expressed as a percentage and represents the income return on an investment for a particular period.

Unlike ROI, yield is usually calculated on an annual basis (known as annual yield), which makes it suitable for comparing investments held for different periods.

Note Return Value:  Better

Yield PRO:  Calculates the Income generated by an Investment on annual basis

Yield CON:  Static amount and does not consider time value or if Cash flow is not consistent

Calculating Note Investing Returns #3

Internal Rate of Return (IRR)

IRR is a more sophisticated measure used in capital budgeting that calculates the percentage annual rate of return at which the net present value of cash flows (both inflow and outflow) from a project or investment equal zero. In other words, it’s the discount rate that makes the NPV (Net Present Value) of all cash flows (both positive and negative) from a particular project or investment equal to zero.

IRR is typically used for projects with multiple cash flows over multiple periods, is a dynamic measure, taking into account both the magnitude and timing of cash flows along with considering the time value of money.  There’s no simple formula for IRR – it’s typically solved using iterative numerical methods or financial calculators.

IRR accounts for the time value of money — the idea that money available now is worth more than the same amount in the future due to its potential earning capacity.

To measure your Desired Purchase Price using NPV (Net Present Value) is ideal

We teach this in our Advanced Note Investing Training Class

Note Return Value:  Best

IRR PRO: Accounts for Time Value of Money, Annual Return

IRR CON: Difficult to calculate and need to build out a payment table.

In summary, while all three are measures of investment performance, 

• ROI is a simple measure of total return without time consideration, 
• YIELD is an annualized income measure return from an investment without considering the time value of money or changes in cash flows, and 
• IRR takes into account both the timing and magnitude of cash flows over the life of an investment, reflecting the time value of money.

To learn more about these three jump into our Financial Calculator Class Today!

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