Mastering Note Returns: When Holding and Selling Makes Sense | Real Estate Notes Show

Episode: Mastering Note Returns: When Holding and Selling Makes Sense Dave's Goals and Plans: - Playing a wiseman in Calgary's 60th annual live nativity production - Dedicating the episode to Patrick for previous discussions about note returns - Planning to explain yield and ROI concepts using screen sharing and financial calculators - Attempting to bridge the gap between note creators and note buyers through education Nathan's Goals and Plans: - Working with Dave for over 15 years buying notes - Excited about diversification topics planned for next year's DME conference in Nashville (May) - Securing sponsors for the upcoming conference which has sold out the last couple years - Planning conference featuring different experts discussing specific niches in note investing Key Recommendations: - Note creators should structure loans with borrowers paying servicing fees to allow buyers to purchase notes at higher prices - Buyers should analyze amortization schedules to understand total interest paid over loan lifetime - Calculate what happens if borrowers accelerate note payoff to see impact on yield - Understand that yield remains constant even as interest/principal ratio changes throughout loan term - Sign up for DME (Dealmaker Event) conference in May for networking between note creators and buyers Topics Discussed: - Difference between yield and APR in note investing - How amortization schedules work and why interest payments decrease over time - Why ROI doesn't capture complete picture of note returns - Principal versus interest payment breakdown across loan lifecycle - Bridge between perspective of note creators versus note buyers all right we're GNA do a little special thing today we're going to be talking about yield and numbers so we're going to be doing a lot of screen sharing so we're please forgive our podcast listeners they're going to have to listen watch this live but before we dive into our awesome topic how you been my man Christmas season around we got the Beards going everything else not bad I put out a post yesterday dedicating this one to Patrick fr we've had a few discussions about that but yeah I'm uh we had our dress rehearsal last night for our Nativity that happens in Calgary this is the 60th year that they've been doing this live nativity so it's uh fun to be part of history but yeah I get to play a wisan so I gotta pretend to be smart awesome it's crazy so one of the things we talk about a lot is buying notes and creating notes and this numbers that numbers and what we find is a lot of the people who watch us and reach out to us get a loss in the numbers right these things are complicated financial calculators and yield numbers and we decided for our last show of the year to kind of go back to basics and explain a little bit about what we need when we talk about why Roi doesn't work out what's yield and how does that play in any of this stuff yeah we had a couple of questions come in and that kind of spurred us to S of thinking about this and how we could explain what we do and why we do it and like and and why the numbers show us that that's what we should do uh and so we thought we'd kind of share that with people and I think this is going to be very interesting we'll see how this goes um live show so if we make a mistake yeah please forgive us if we have some mess ups and stuff like that and listen if we're wrong on the math please call us out on it right we have a couple people in our private group that are listening in and tuning in because sometimes when you do things live the numbers don't always add up thank you cdy for the nice compliment that's awesome thank you over there so we talk about this stuff we have to understand that what is a note the basics of a note if you take out a mortgage with your bank what what's it all mean right you're taking out a debt on your property and that's all good and you get an APR return all that stuff normal stuff but then we throw in this Roi yield number why is in the world why are we not on APR APR incompass is more than just the yield yeah yeah we and we're in a kind of a unique situation where like you say we all go get mortgages for our own homes when we're buying but it's not until you start getting into this business that you start looking at the other side of that what are the banks doing how are they actually making money um and and yeah it's an interesting flip and you you got to change your brain on on thinking about it a little bit differently and looking at it a little bit differently so we're going to attempt to kind of show that and show some things that we've figured out and uh things that you know we've kind of put in place and like you said Dave if there's a different way to do it or if we've done something wrong please let us know we're we're more than happy to be corrected and illuminated on what we're missing so please let us know absolutely so you know first to start off with is we want to make sure those who don't know who we are who know who we are right we me and Nathan have been buying notes for over 15 years we really connected or try to connect with all the note creators as well as note buyers but bridging that Gap letting the note creators learn more about who we are as note buyers and allowing the not buyers learn who the not careers are right and when we do that kind of stuff for people people can do business together all day long and the marriage happen but it seems like a lot of the people get confused on what the other side's doing and it's really interesting one of the things that I found really interesting as we've talked to more and more note creators is how we think differently than a note Creator thinks and I found that really interesting because we're we're both on the same side of the of the table and this one but the way that somebody who's creating a note will think about it differently than somebody who's just buying an existing note and so we're we're trying to get those two sides together uh so that we can kind of collaborate and say look we'll buy your notes all day long if it's made like this and they always want a list and that's tough for us to do because it's it there are circumstances and there are different things that play into it but we do the best we can to come up with a list of like if you do ab and C then we'll buy it uh at this price but so we're going to try to attempt to to kind of explain a little bit about that and how that works and what we're looking at uh as know buyers instead of creators yep absolutely and just to let you guys know this is recorded this will be on our podcast well as uh it's being live on YouTu YouTube LinkedIn and Facebook um and we have some of course some friends chiming in I see Cody saying uh foring the beard yes we appreciate you reaching out Cody um and whatnot so with that said when we talk about yield most people see an adoration schedule right and we're going to share some screens here but they see his adoration schedule and say well why at the end of the term does it go lower what I'm only getting 100 bucks on this interest where in the beginning I was getting most of the money yeah why is that so because it's an interest rate anytime that you're making a payment and we'll we'll show this visually so you can see it but as you start making payments so um let's say your monthly payment is $500 a month at 500 bucks a month at the beginning of that loan you're mostly paying interest and a little bit of principle with each success of payment you're paying a little bit less interest and a little bit more principal so it ends up kind of being a curve that goes down over time at some point in the in the life of the loan there's actually a crisscross where you end up paying more principal than interest and then for the remainder of that time you're paying more and more principal and less and less interest until at the very end your last payment is almost completely principal and your uh interest is almost zero so it's an interesting thing to look at and we'll we'll show you what that looks like with an amortization schedule yeah absolutely looking at that that's an important piece yeah and some people say well the end of the term the interest must be changing right the rates the amounts going down and we say listen take a schedule and say what is 10% on 100,000 and what is 10% on $100 that's the reason your interest goes down is because that the interest on the unpaid balance is lower yeah it's still 10% right it doesn't the interest rate doesn't change your balance your loan as it goes down through the amation schedule drops right and and over time that the balance starts to drop faster uh the closer to the end of the loan you get but again your yield is still the same your the interest rate on that note is still the same so that that doesn't change but just that ratio of principal to interest changes yeah if that makes sense yeah absolutely and the last part before we start getting in the thick of things is that you know understand the fact that this is a mathematical game right this isn't a PDF it changes with going on and shout out to Dave Miller who actually brought this topic up and oddly enough me and Nathan spent two calls to kind of get what we want across so we're going do our best for our last show of the year um before we dive in Meet though before we if you guys get before your Christmas time and your New Year make sure you sign up for DME which will be happening in May uh if you don't know what that is no buyers no creators are coming together with for two days and talk about two and a half days to talk and network and get together the tickets are live it's nation's uh Nathan's event down in Nashville yeah I'm really excited about it we've got uh sponsors coming on board if you're looking to sponsor something get on board quick because that we sell out we've sold out the last couple years and if you want to be there as a sponsor make sure you get in early um but yeah we're super excited we've got a very interesting range of topics coming up uh for next year's conference we're we're kind of leaning into the idea of diversification so different ways that you can approach notes and we'll have different experts in those fields talk about what they've been doing over last however long uh in their specific niche of notes and so we're very excited about that it's gonna be a very interesting conference it's going to be a lot of fun awesome so um we're going to be doing some sharing screen here for a minute guys we wanted to ask the crowd and put this in the chat again YouTube make sure you're subscribe and all stuff is do you ever calculate how much is paid a 30-year loan right as a buyer you may do it but you ever looked at your own note and say what happens if and you'll be astonished right I think people uh are fusted when they look at this stuff and say whoa and I'm going to tell you right now every penny over the original amount is interest it's gains right and when we buy these things we want to make sure we make every any of that interest so if your new careers are looking at it we have a video replay of it 14 points do your best to get the borrow to pay servicing fees so we don't get hammer on that monthly fee and allows us to buy that note at a higher price so let's go to uh our shared screen here let me bring up the uh zoom and share you guys what we're looking at everybody wants to do some math right before Christmas it's perfect yeah hopefully we can see that screen if you have any questions if you have a problem let me know and uh we'll go from there hopefully you guys see it if you can't Nathan I'm going to send you the link just in case we can't um I think the way we have it set up it may be problematic so what I'm going to do is I'm going to stop shareff sorry guys for those that are doing it um Nathan I'm going send you the link just so you can open up and shareing your screen because I'm have problem on my side here um with what we're doing here and the way it's set up so give me one second all right so so while Nathan bringing it up we wanted to show you guys how yield changes everything um I see Jay making a comment regarding that's why you accelate note BR home that's awesome right um and whatnot so hopefully you guys can see the screen um and uh I'm going to take that off so you can see it all right we're going to dive into this thing if you have problems feel free to put in the chat and we'll go from here so when we when we do this yep let's do that there we go all right so when we look at this stuff we look at the fact of this is showing you a ton of information of an amation schedule now we had a copy paste so we don't scre up any numbers here you get an idea of what it looks like right so we look at the fact that the aition schedule starts at month zero goes all the way down now when we do this what does this mean for everyone else right this means the fact that when we when we buy this not we're buying in a certain period of time inside this note period okay we may be buying at month zero maybe buying at month 100 why is that matter we're going to get into that what that difference so I'm just going to do it on top here a quick thing and I'm going to show you guys what the total right is on this so we see the fact that total payment on this note $180,000 right this is a $56,000 original balance note and they're going to pay 180 Grand 130,000 or so right it's crazy 125,000 23,000 in interest sorry it is nuts what what's going on here so when we talk about this over the 30 years the total that the borrower is going to pay is 180,000 even though the balance is only 5975 every payment uh what's the payment is 474 for sorry 500 bucks a month yep so over 30 years that adds up to $180,000 yeah and so I don't know if you've ever had this date where I I was doing uh an origination way back when back in like probably 2011 2012 and as part of origination you send them an amortization chart uh and so I sent it and they went what what is this and they like freaked out they're like what kind of scam is this you're trying to make us pay $180,000 and I was like no no no that's just how it works like over time you're paying in interes in principle I tried explaining it to them and they just they thought I was trying to pull something over on them and they they just couldn't let it go and so they didn't end up buying the house uh but I just found that really interesting like nobody I I don't know how many people actually stop and look at uh an amortization chart anytime you've borrowed money at an interest trate uh if you actually do this exercise and be like oh that's why I don't buy stuff with a credit card you know what I mean or that's why I don't car a balance absolutely crazy so we look at this stuff you know one of the question that Dave Miller asks us is like does it matter if you bought the tail or the beginning absolutely does right what we find out is that it matters where you buy it at why is that because where do you get the most interest the beginning because if you want to sell this note and if you bought it month one and you want to buy it at a certain yield right and I'm going to put in here a real quick number here if I want to create this this uh and I want to buy it at a certain rate so would say I'm going to buy this thing at a a 14% rate and uh and I know the fact that there's 359 payments left and the payment is 500 bucks right I'm going to buy this thing at a $42,000 purchase price in m in M4 there right and the reason being is there's 360 payments left what happens in month from month from first payment month one to month 12 how much difference is that upb the unpaid balance nothing yeah it's 300 bucks yeah yeah so if you want to sell partials you can sell partial every year after year and you're really not giving up you know if want to buy partial this is the perfect time because you're getting a lot of the interest and not the principal it's not paying down as fast right yeah that's the key here is when you do it now if you put it out and say I'm going to buy it for three years or four years you can find out when the when it starts curving as you see in the curve screens what it looks like the curve screen will show you when the principal interest changes and when that happens that's when selling it makes it difficult because a principal gets paid out much faster and it drops in the value of the Noe itself so you have to buy a tail with a much bigger discount because you don't have many payments left so no creators buying at the begin selling at the beginning is great for you right you can sell a thing five years of payments partials and make it happen because you're going to get it back and have most of the princip still there you need to get your money back and get the yield as well and as for somebody who's borrowing money to do this so in my fund we're paying our investors a set interest rate so I for me actually a longer loan is better uh so a 30-year loan is better than a 20-year loan why because it takes longer for the principal to drop on a 30-year loan than it does on a 20-year loan on a 20-year loan the principal goes down much faster so I can hold on to a 30-year loan for longer than I can hold on to a 20-year loan and resell it at some point in the future get my Capital whatever I paid for it I can get all that Capital back out uh and still selling it as a good yield to somebody else so for me a longer term I'll hold it for a year or two or three depending on the Note depending on the rest of the numbers that behind it uh and then I'll resell it get my Capital back out because again it's borrowed money so that's my Investor's money that I got to get back out and then I'll turn it around into another note yeah if it's my own money maybe I don't care if it's my own money maybe I just I want to hang on to it forever and I'll just let it go and that's uh you know as they pay off naturally that's the point where I'll recycle the capital and then another but you could also hold it for five years let the fund and then sell it and because it's the beginning of the note there's still a lot of months left and you can get that more money because it's still higher percent of interest to principal in the amation if there's only 10 years left and you literally have 10 years left and you hold for five years and try selling it it significantly drops because of where it's at and how much interest is building up on a month-to-month basis because it's only 10 months 10 years left on it now for the first 10 years yeah if you want to buy and sell in five years you're going to make a ton of money because the person buying it is still going to buy it because the upb as you can see at month 120 and just in comparison if you go down if you click on my little head on top of the spreadsheet up there you'll see it I see the fact that this whole thing 51,000 out of 56 after 10 years yeah right so if you bought the first sold the first 10 if you hold it for 10 years and sold it you have a ton of upb left you can now sell it again and still get a lot of it because there's a lot of balance there and the interest is still pretty high yeah right so would love to hear some questions from the crow I see some things coming in now um from Jay and Joseph and all stuff um I see Jay really depends on what you're trying to accomplish here if you're if you're looking to hang on to it and then still get your money back out and be able to turn it around great if you're just looking for a set it and forget it it is a depreciating asset you got to make sure you understand that uh but over time I I I think when I first started I I haven't looked it up since I first started but way back in 2010 or whatever was the average uh time that somebody lived in a property was seven years where they would live in a house and then resell it go move somewhere else what that means is anytime that they sell the house and move you as the lender get paid off so the reality of you holding on to it for 30 years is probably pretty small does it happen yeah of course uh but generally speaking people don't stay in one place for 30 years not like they used to people move around and so you're and I don't know like I say I haven't looked it up in a long time uh what the average is and I'm sure that has changed over time but the principle is still the same uh that the likelihood that you're going to keep it for 30 whole years probably pretty low so if you want to buy a 30-year loan and then hang on to it until it naturally refinances great or you can be a little more Pro proactive about it and you know calculate exactly where you need to be at what point can you resell it and get your Capital back out and turn it around and do all those kinds of things absolutely I see you tell your buyers to pay cash they don't pay interest yeah I think people forget the fact there's interest in loans right um I see another comment from Joe over in LinkedIn we had a guy in our classes who asked why people don't pay simple simply pay cash yeah most of the people who are getting involved in owner finance and seller finances the borrows don't have the cash that's the whole purpose of this right um it' be great to not have to worry about paying interest but you're buying a loan or your your the borrower needs a loan to buy the house it's not free right um or the borrower uh I've heard this several times where the borrower either uh can't go to a regular bank or they don't want to uh and there's a lot of people that just don't want to deal with regular Banks so they would rather do a seller finance deal yeah another comment from is under what condition term would you consider purchasing it the last 3 years of a 30-year loan it's all about the numbers we're just tell you that the discount gets greater because the tail in so let's do an example here I'll bring up this yeah we go come up yep yeah uh all right so oops there we go so this is a 30-year note 360 months at a 10% interest rate balance of $100,000 payment is $877 a month so let's say they've paid all the way there's what did we say three years left three years left yep uh so if there 327 or 357 sorry so there's there's 36 months remaining perfect so that means the balance on that note with three months remaining is 2717 I want at least a 12% yield so I put in 12 and then hit the magic button so I'll pay 26 for for that yep so that's not bad that's actually pretty close to what the balance is at that point uh so that's that's decent but just to give you an idea that's the determinating factor is uh how much do I need industry has close it it also matter Joe what that interest rate of that loan is if that's a 3% loan that impacts what our purchase price can be all day long so for those who call I we had a phone call this morning someone asking questions what's the biggest factor that matter when you buy notes your term of my interest rate outside my collateral and security right in the numbers fashion is what is the term what is the interest rate alone right if you're telling me it's a 50-year loan at 2% interest rate be ready for a huge discount because it doesn't the time value of money kicks in right so let's do that same calculation yep with the three % loan so then I'm go there's 30 there's three years left I want a 12% interest rate hit the magic button oh I didn't do that right but it's close enough that'll give you the idea so 126 so remember the balance at that point was around 27 I'm going to pay you 126 for that so I'm I'm paying far less far less and that's not going to be exactly right because we skipped run the fly here right it's going to take um a huge discount so cdy said uh the average person to jump homes right now is eight years okay well syy knows talking about we'll we'll definitely go with that um we had another comment from Marco uh been an assumption three and a half% loans out there will stick around longer than seven years okay we're on the same time frame um so if you're investing with a self-directed IRA you own a 30-year note you sell five your partial you have to claim the majority of the partial sales interest yeah yes um we won't get into the accounting part of this but yes so if you yes you have any interest on a loan that you're collecting you're going to have to pay interest uh taxes on it so yes so unless the Roth then we're talking different area so I see Warren gin over on LinkedIn um compare yield to cash and cash return when looking at these deals cash and cast is a different formula different Factor um I tell people if you're doing your own money feel free to cash on cash Roi have fun with it but if you're leveraging any kind of capital I promise you that your lenders not saying I want cash and cash they're probably giving you an interest rate at seven six five 10% a year well you have to play with apples at apples and say okay if that's the case what did I return yeah right and then if you want to say Okay I want to use my IRA well if I could put my IR in the stock market they don't use cash on cash right they use returns and how do you compare that so you really want to stay you can figure out cash and cash but I just highly encourage people to really kind of pay attention to make sure that they're playing with apple and apples I get it cash and cash is a very easy formula yeah and and if you want to do the cash on cash you're making $180,000 over 30 years I divide that by 30 yeah you bought it for X dollars yeah for the 180 minus the how much you paid for it and divide it by 30 you want to do it that way um I get there's some there are some nuances you really should carry the interest right because you're getting your principal back I get that um and whatnot but without getting the thick of things the the real Focus here is why is yield a big deal here and what happens with theorization schedule and how much you get paid right so um do we have that chart do we have the the curve chart we uh we can I don't think we have it on here but we can definitely show it if you have your calculator you do have it on there no it doesn't show the it used to show the curve chart now it just does like a a different looking chart that I don't like as much let me let's see if we can show this real quick so guys if you ever Google amation just says that curve you're going to see an idea what it looks like and just do it you're going to see quick idea why it changes everything so um and what happens with that so one of the questions we got asked was you know if you buy a note do you ever hold it for term I calculate in my calculator threee fiveyear a twoe threee and fiveyear sale price why is that for multiple Reasons I'm most likely not going to hold a loan more than five years I think the longest way ever held one was 8 years and to me it made no sense to hold it if the numbers well so as we go down through the mization schedule it makes it worse and worse to sell because it's flipping less interest and more principal and the borrowers paying the principal down faster so it's not as valuable because the interest is going away your profit your interest is your profit now if you buy a discount part of your principle is profit but most of your interest is your profit in that world so you want to get as much of that in there as it starts dropping down the interest starts reducing because the upb reduced and that starts happening quicker and quicker and quicker as you'll see in charts right and it's amazing when you look at it that account stu um go back to some of the questions we got going on here um from uh Jay as well David what are the yield projecting your note sale price at 2 three and five I'm going to tell you what I do what Nathan does what you do are all different yeah that matters what you do if it's your own capital and you're trying to beat a 7% or 5% Bond make it 678 I'm going to guarantee you guys if you're buying notes with your own capital and you can do less than us on our Buy price you're going to beat us every time yeah we don't have a magic wand right if we're borrowing money at say 15% we have to beat 15% but if you don't have to be anything undercut us get your deal at 8% 9% that makes sense so it depends on what you're doing so good question though when I project out what I do in my calculator okay if I'm going to hold this note for 2 years I'm going to sell it at an X yield as a performing note at a say a 10 11 12 I'm going to project out and I'm going to BU what I do in my calculator Say Okay and we teach in our class um in the advanced classes I want to buy it in that first two years I want to buy and make sure I get it X yield whatever that return is and then we turn around and say okay fine in 3 years I want to hold up for 3 years and get an X return at a sale price of selling it at 10 years yeld and then we go on five and then we take the worst of the three and say which scenario is the worst case scenario if we do this kind of stuff now this also encompasses if it defaults everything goes into play I just talked to someone the other day that all they uses that financial calculator to buy notes um and I ask the question what happens if the note defaults and the answer is they don't know and that's that's Troublesome right um yeah uh I see Mr Gomez over here said we can go to a website vertex42 they have schedule I'll put in the in the in the video here for you on LinkedIn but yeah you can definitely go anywhere just Google alization curve graph and you'll see all buch images on how it just starts going right it crosses over so that the principle is higher balance than your interest at a certain period of time we tried on this on this calculator and those who don't know I'm a crazy spreadsheet guy to figure out where in that section does it actually change so what we did on the on column I that cold column over there is we figured out the change of upb During the period of time and when does it really change as you can see it starts off at changing about like a a 0.1 01 and as you get down farther and farther it changes dramatically to a point where it's changing one% in a blink of an eye then as you get down go go go and right in this case yep right around month 277 now you've got your interest in principal right there is where it flips yep where then you're paying more principal than interest between 277 and 278 so out of 360 months so it takes a while as you can tell but uh but it does eventually cross over and that's that's this scenario if it was a different interest rate if it was a different amortization time like a different term that's to change so who knows but and that's why you got to do the calculation and as you scroll down Nathan you start seeing that that B that col ey starts going crazy yeah from one and then it goes nuts two and that's a difference between the balance of last month and the balance of that month and you can see it goes crazy the end where it just starts jumping 10 12 13 and that tail it just goes up like crazy yeah yeah and that's because the balance of the the the deal goes so for those people are saying when should you buy your best time to buy note is the beginning of it right you could buy the tail but it becomes problematic it becomes more of a discount than if it was the beginning of the note because if you want to sell it in three years yeah it's hard you could argue that if you're buying a tail they're going to pay off early there it's it's not likely that they will just run it all the way through they may pay off like the last year early something like that if you do that then your your return actually goes way up and so that's to ask you what happens if you get a payoff and the yield a 30e loan what happens in a 30-year loan when it gets paid off in year five yeah payoffs are great we encourage and the reason being guys the definition of yield is what your anual return till maturity like a savings bond or any kind of bond now maturity is in 30 years what happens if maturity is not in 30 years is in 10 years because you got a payoff in that period of time and all your money is back to you right it dramatically increases your yield to know the fact you got a payment string of 120 payments and all of a sudden at that point in time you got to pay off right um I'm going to do some quick math here so I can show people what it looks like but it is unbelievable what happened so if you are looking at the fact that does payoffs help or not help they absolutely do help so is selling a not right it can increase your yield because you're getting a lumps of money in a faster period of time and you got it earlier in the time period that even helps even more so uh boom so so that's a question that most people ask is what happens when that when that goes on so you're going to look at the fact you're going to get a return so I did some quick math and this isn't exactly correct because of uh number of payments all stuff but you're going to get a lump sum in this case scenario if you bought it at month one and you got a pay off of $51,000 and you received all this interest right you're going to get a much higher yield than that little simple thing because the return got faster you didn't get all the principal from the borrower you got a lot more interest in this case your interest in this one field E4 through e123 was $54,000 so you're going to actually have $54,000 plus the 51 $106,000 in payments in 10 years that's good yeah you want that that this is why we encourage payoffs yeah so payoffs reies sell on the Note all those juice up your returns yeah and makes things different right um uh so Marco asked question how do you guys underwrite notes with balloons with short balloons three to five years in existence honestly I don't buy those yes why don't you buy them I'm staying Bo you are but I don't buy them because there's a few different things uh so let's say I'm looking at a loan where uh so like a lease option is a great example uh lease option where they're making payments and the in the deal uh at year three the deal is that they go and refinance and pay you off my experience has been that that never happens I've never had one success pay off not that I've bought a ton of them but in the handful that I have purchased it doesn't happen so that's number one uh so that expectation of getting paid off at year three as it's written in the lease option contract I've never had it happen and actually we had this discussion didn't we in uh one of our private calls yep and same thing I don't think anybody had ever had somebody actually pay off at year three like it says in the get it most time it's refi right that's to hope and pray my problem is what happen they don't right it just makes it messy makes it problematic and as I know Marco knows if it's this is a dodf Frank thing that has to be a consumer that has to be a business loan that can't be Consumer loans for those who are creating notes you can't create a balloon within the first 60 months yeah that's reason number two if it's if it's a consumer loan and there's a balloon written in that's not compliant with Dodd Frank and so I I don't want to get into that and so that's that's the number two reason why I just wouldn't even buy one of those yeah absolutely it's just they tend to be messy yeah absolutely so when we talk about this stuff it matters so when your guys are looking to sell notes and you say is it worth it me to sell a note we can't answer that question yeah what do you need the money for what are you after yeah what what changes things but when we buy notes we look at these things if I buy it and sell it in 3 years versus hold on over 30 years I can buy it typically at a little bit less discount because I don't have to worry about holding it to get my money back right I can sell it in three years when the principal interest when the principal interests are more even where it's not as valuable to me anymore because I I got mostly interest out and I sell to you at 1011 I can juice up my returns right that's often what we do yeah and if you go back to that original example like we're talking about um I bought the note when it had a 569 balance a year later uh I'm going to sell it when there's a balance of where is it 5676 740 that's a $200 difference so when I'm talking about buying and selling I I don't know what I paid for this note I paid let's call it 45 um and my yield at that was like 12 29 or something like that you know what I mean I won't do the calculation but just give you an idea a year later when there's only a $200 difference in the principal balance it's very easy for me to resell that at 45,000 again so all of my Capital comes back to me all you guys all interest right mostly interest and then right and the buyer of the note the one that I sold it to they bought it at a 12.25 you know what I mean so it's it's a very easy thing for me to resell it um near the beginning there so so I add it up I see the fact from month one to month 12 total principal $234 yeah so your principal dropped $234 and in that time period you collected over $4,000 in interest right that's why you're buying this and selling in a year is probably beneficial for you yeah go buy another one and get all interest now you sell this thing at the same price yeah right or can I push that and go to two years where it's dropped another 100 bucks 200 bucks yep probably you know so I look at that and I say so how long do I have to hold on to it before I need to sell it so that I can then get my Capital back out that's thing I look I see the fact that in month 24 uh payment 24 line 27 a total of $666 line 27 yeah 66,000 principles paid off that's it in 24 months in the mean same meantime you collect 11,000 in interest now if you want to sell this at a 12 rate is 48,000 but you've already collected $4,000 yeah right and again with rounding if I bought it for 48 and then I'm going to resell it for 48 everybody's happy everybody wins yeah so this is why it matters when you calculate this now if we going to hold this for 10 years we understand you get most of the interest and then you're going to sell it right these are some of the higher level people when they figure out what they're going to do and how they're going to do it and how they're going to buy and sell right to me it makes sense if you want to make the most amount of money selling the note you want to sell the beginning of it because that person is going to pay a lot for it right as it goes down they're going to pay less than less for that note because of theorization schedule where the tail becomes the least attractive because of that reason now you can play with us all you want and I'm going tell you guys I would do it try it play with it play the finch calculator play with the anization schedule and just try different things you're going to be astonished at what you find out right making sure your calculator looks at something whoa if I do this and this this you're got to find things that we didn't explore I encourage you guys to try taking a look at that um which is real quick this is why you've probably heard us say this before you have to have your own calculator so you know you can use whatever calculator if you're going with a spreadsheet calculations great if you're using just a regular calculator great but understand how it works and play with it and eventually I hope you're building out some kind of a spreadsheet one where you can start fiddling with the numbers and you yourself for what you're after because everybody's approach is just a little bit different uh and so that's why your own calculator is going to make um a big difference to your business that's an additional plug for that with that said I had a call yesterday with an investor who said that you know they use it the flan calculator St and they said they bought on upb and we went through the whole conversation why you never buy on this percentage of upb because it's dangerous the interest rate changes your term changes everything please guys if you're buying on percentage upb it's easy to do I get that but you're going to get yourself in a bad spot especially if you're borrowing up other people's money it's bad right hey so real quick we had another question I think this is a good place to fit that in uh so email coming uh I think it was earlier this week or last week how do you calculate if you're hanging on to a bunch of notes um how do you calculate your net worth on that and we we kind of talked about this briefly but we didn't come up with an answer so I'm curious daveid what would you say how do you what number are you going to use what uh what do you look at for what's yourwork this is something we do in our Ira often right we kind of figure out what the value of your assets are and my old rule of thumb is its value what the upb is that I can sell this today at the at the upb and sell it is that realistic no right most people are not going to buy that but that's a kind of round number right and I'd say is my value of the asset is that the of the debt that's owed however on the Market Street that doesn't right right so you got to flip over and say okay what can I sell just like a piece of property if I want to hot sell this thing what can I sell this thing for in a second in 30 days and that to me is your real true net net worth and your notes saying if I want to sell this note I'm going to shoot for an 8% sale price and what can I buy sell right now at 8% yield that I can guarantee you I'm sorry reverse that I want to sell this thing at a 15 yield right yeah because eight Ys gonna give me the lowest No One's Gonna Be but if I sell this at a 15 everyone's going to jump on it right yeah I'm going to sell this thing a 15 yield to me that's a hot sale and I explain Hey listen you know something happen I need Capital I'm selling at 15% and most likely for your know creators that's what you guys should do that you know you're going to go get a 30% return on Fix and Flip property sell it at a 1415 get your money out quick and then move on to a better deal because really you're then sit doing you're borrowing at 15 and go get 30 that works every day of the week yeah how you do it this is where it gets a little bit funky because I totally agree that's how I would do it but then the more I thought about it I thought okay how I calculate it today is different than how I would have calculated it five years ago when I was buying all non-performers in that case a percentage of upb was useless that that was a dead number it didn't mean anything so it it it's not an easy yes question to answer because if you've got let's say even in your portfolio say you've got 10 notes if one of those is non-performing or two of them are non-performers uh that's going to be a different thing that percentage of upb at that point doesn't really matter because you're not collecting anything on that so then you got to start looking at well what's the property value same thing if I had to fire sell this what could I what's kind of my drop dead you know value that I could resell this property at yeah so it's it's a tricky one there's no I don't know that there's an easy answer to that but I don't think there's easy answer for non-performing performing is a lot easier right I think is if I again it goes back to what can I sell as non-performing on the market and that's typically what it is that's probably the best way to calculate it but I tell you that everyone would bid that differently performing notes people bit differently but not dramatic right right we're not performing most people don't have the cers you and I have where every State's different costs are different for every state and most people just use like a flat number for every state and Texas is the same as Ohio which is not but I know most people do calculate that way unless you take a classic we have and you turn around and say okay listen if I do this what happens in Ohio where I'm going to have to wait 12 months or 18 months all that kind of comes into play your taxes come to play and all stuff that changes my bid versus someone else who goes okay I'm going to calculate at 80% we're not going to be the same market for performing notes typically it's the same thing Nathan wants 12 I want 13 and that's typically what a performing note difference is who has a lower threshold right yeah but also who can close faster and who's not window door knocking you know checking out things yeah yeah I and I've bought notes before from people specifically because I wanted to have more of a that relationship where we're buying and selling um and so that could play into it I mean there's lots of factors but uh you know yeah and with this amation schedule we talked about before is partials if you are looking to do partial if you're able to get this note at 123 yield go sell a 10% partial and you're going to make out I mean it makes sense to sell if you can get a lower return because then you're borrowing 10 to make 12 and that person is going to make is going to get you're going to get more money for that note if you sell it at 10 versus 12 it just does the math works out one more thing on the partial so we've had this discussion several times for me it doesn't make sense to buy a partial why is that in the fund so again I'm always looking at uh my Investor's capital and how am I going to make sure that that is protected and and that I'm not having to come out of pocket to pay them back uh so when I buy a partial typically it's going to be five years or less typically uh so let's look at a five-year term there so I buy a partial for five years I'm going to hang on to it for 60 months at the end of that 60 months I have nothing to resell it's just I've collected payments for 5 years and now it's done and I give the note back to whoever I bought it from so for me there's nothing to resell there's no way to get the capital back out the only way that that could work is if I bought it at a good enough yield that I would set aside a portion of each monthly payment to go back towards that Capital the problem with that is then I've got a whole bunch of dead money sitting on the sideline as I'm bringing it in in that it's just sitting there doing nothing and that for me that I just can't stomach that I just got to be doing something so that's it gets again it's it's just because I'm borrowing money essentially it doesn't work and so that's uh that's where I'm coming from so for those who are in that kind of a situation uh something to consider and if I'm missing something please let me know yeah yeah I agree you um I'd like to hear more you guys who are creating notes what this matters I hear from most I talked to not Creator this morning and he says you know the property is in great condition the property is this property is that the numbers the numbers matter the type of property matters the functionality of the of the note and how it's constructed right and there's a big misnomer going around that you can you you can create lesson three notes not underwrite guys please underwrite every borrower if they're on occupants um the rules are different right that's a completely different ruling but as we talk about in our our our buy calculator that we we have a class on and there's a link inside the chat that you can click and I'm going to see about running something in January we're going see what happens there um is it matters what state it's in it matters if it's created matters where location is it matters all that kind of come plays and at the end of the day we go back to the amation schedule this is our bottom line factors if this is a 2% note we have discounted a lot and then everything else come to play so if you are a Creator note the first thing you should telling us is where it's located what's your interest rate what's the term and what kind of property is it is it land is it a residential commercial at that point I can typically say I'm not in on my insent that's it telling me the fact that you rehab the last year or the fact that you you've fixed and flipped the other factor is if it's a rap note that also a big change you're wrapping around a sub two that changed a lot too I've had people talk about telling me how much Equity there is and stuff and I'm like okay that's great but it doesn't make it more valuable but but those are the kinds of things that we're trying to come together on so we can understand each other absolutely you know having 50% Equity that sounds awesome um if it's a performing note that really doesn't make any difference to me if it's a non-performer that's a totally different story but if it's a performing note a ton of equity doesn't help it doesn't make it more valuable we had a question from uh CD willly I don't know why it's not popular in in the chat here but if you're reselling a note you'll have to take a discount on it because the yield is less than the next time around correct I'm not sure what next time around means uh if that the case can you expect to get back when you paid for the purchase for example you buy a $45,000 note hold it for a few years and resell for 45 where's the discount right in our case example what Nathan has here you're buying at a 45 and selling a 45 and the reason you're doing it is because it the the amation schedule is mostly interest yeah in the beginning the discount is calculated on the principal balance not what I paid ver for it versus what you paid for it so the discount is is a percentage of the upb kind of careful what I say there yeah but it's it's it's um it's based on the unpaid principal balance that's you're discounting on that not on I paid 45 therefore I should sell it to you for 43 yeah no let's go to the top real quick right look at we're think at the fact that we bought it month one right um and we're say at a 12 yield uh and we have 359 payments left the payments 500 right we're goingon to buying at 48 595 yeah okay and then we're going to go to uh month 12 right which is uh 15 the 48 that same number is a 12% right and it's yep so I'm going to buy for 48 MSL for 484 485 or 486 almost and 484 right the upb didn't change much but my return on this thing it my if I bought it for 486 and I'm going sell for 484 so this number here and this number here are the two numbers I'm looking at and for me I'm probably GNA round that so I bought it for 485 and then I'm going to resell it for 485 and it's you know $70 off on the sales side um I I don't think anyone's going to Blink at that that's you know it's $70 less and you collected five grand in interest or so or little less than that but so that's how I would look at it and and somebody might come back and say no no no 48432 okay fine I'll give up 70 bucks on the deal if I need to uh I hope I hope that helps you out right yeah again it's all about the math here it's all about for me it's visually seeing this work out yeah now if we go to to 120 payments I'll let you click on my head in a second click on my head now PV at same 12% divide by 12 and then there's uh 240 months of payments left pay amount is 500 48 454 okay not much change at all why is that because it's all interest the principal balance is still high right yeah this changes dramatically as everything else goes down right now let's say you're able to buy at 13 yeld this changes everything now you're able to sell at 12 later you'll be able to buy at a better a lower discount to get that number work out hope that helps you a little bit understanding play with the numbers yeah You' be understand I have a a I have um uh training for 100 bucks whatever a video training on doing formulas inside spreadsheets or get yourself a flaner calculator and play with the numbers right to learn how to work these things no buyers and no creators this isn't just no for no buyers and learn maybe hold this note for a year before you sell it Maybe not maybe say listen I'm not going to sell the whole note I just want to sell the first 10 years whatever works for you right so again I put in the thing a link for a class we're looking to run and let me know if you guys want to get in all details it's in the bitly link as well as you get our information reach out so uh we're getting to that one hour kick let's go back to two of us and let's uh chat for a minute before we and share with everyone what we're going to be getting to yeah okay all right so next year next fall we're probably going to go over our goals for 2025 we haven't fin that yet however we want to hear from you guys what topics issues concerns you guys have we had a nice call on a private group about debt license which we haven't done the show in a while um for you the guys who are creating notes make sure you understand your debt licens in your state that's huge because if you're holding a note in North Carolina and you're created it you need to have a license even if you use arm alow you need to have a license to hold it down we're going to be talking about all kinds of stuff like that as well as bringing on other special guests to talk about thing with that but we also want to en encourage you guys to give some topics some suggestions email us over and if we explain something that you didn't understand where were it's key I did want to before we disconnect I think Han jumping on from Miami uh p is run the win group uh special so in the women in notes group is be happening soon uh feel free to reach out um let me see if I can bring up that link thank you for reminding me H uh but if you AR if you are a woman and you're looking Patrick says beard the brand yes um so if you can feel free to check this out it is women in notes it looks like it will be a notes retreat in 2025 it and it will be try to find a DAT for you have March 27th through the 30th of 2025 live it'll be in Sumer range um make sure you get reach out to I'll put the uh Link in the chat and uh comments and the YouTube and all that stuff feel free to take a look at that and see if it if it fits you if you're interested if curiosity please feel free to reach out and do it so I put that in the chat for you guys um yeah talking to Hana about that it sounds really great actually it's it's it's set up really as a retreat so they've got spa treatments and then they've got you know all kinds of pampering things at the same time as as a real working Retreat uh where they're going to go and have some some time to kind of reenter reach out and just learn about it yeah looks really cool um but please guys again tell your friends about the show if you have some things we want to cover we're going to bring them our special guests next year um we're going to be exploring a little bit more things we want to get some feedback we don't get much feedback from you guys we hear we appreciate the compliments we want drill in things that maybe we overlooked maybe something you just didn't get right we can bring on the guests and talk about it but we need your feedback and what we're doing uh I encourage you guys to get out the DME get out to the Wi group and jump in and learn um again the Billy link has a link to our uh project I'm working on in in January we'll see what happens from there but either way it's been a great 2024 I've learned a whole lot of information and I continue to learn I continue to appreciate people jumping on and sharing things we learned the other day someone didn't know you can't put a deedon l inside of a a note um right you can't do that you can't have it out in the pocket Dean L as much as every one of us would have love to do it during modification time when we modified everything it would have been awesome can't do it but learn feel free to reach out be honest be open don't know something ask right Nathan has a Facebook group we have a Facebook group LinkedIn YouTube Everything ask Reach Out email us use the link get our information anything else you want to share before we disconnect oh man it's been a great year um a really good year and and you know I've actually changed a little bit I've modified a little bit the the kinds of notes that I'm looking at and things partially because of what we've been doing here yeah it's been really very interesting and I'm really looking forward to next year it's going to be a really good one we'll get into goals next time but uh we have some special things coming up that we're holding off telling people about right now um some things in the works um and see what happens from there um we encourage you guys sign up for the DME sign for all that stuff um I'm going to be putting a special together product for my website for all the little trainings they got going on I'll probably put that out later today uh if you want that special code and all stuff it'll be in an email put out get as much training as you can if you're off from your work for a week with the kids throw in the background learn listen to podcast share the information all we can do is help so yeah with that said everyone I have to ask Nathan the final question what do you see in six months uh 2025 is looking really good I I think it's shaping up to be a really great year um I'm very curious to see I'm I'm watching more closely than I have in past years I want to say uh just to see where the housing Market's going and and what kind of effects that's going to have on what we're doing I think it's going to be a great year though um lots of really good good things happening uh lots of different ways that you can you can get into notes and and uh kind of figure out how they work and how it's going to work for you um yeah it's gonna be a great year so looking forward to it without touching about your big change you're going to be making adjustment on some of your Investments I think we're doing the same thing over here we're going to adjust and that's going to be another topic we're talk about interesting Yeahs we're adjusting because not buying is great but there are some markets in this industry that are killing it and we want to be part of it right yeah so till next time till next year take care brother it's been pleasure thanks guys yeah.