Re: Apples Sliding Down Slippery Slope. . . - Posted by JeffB (MI)
Posted by JeffB (MI) on July 12, 2005 at 23:39:21:
I hate to beat a dead horse and don’t want to sound like I’m nitpicking, but this is a discussion forum and we are all hopefully learning something here, right?
Your statement: “…there is no spread on a deal yielding 50% if you borrow 22% per annum money for 4 years to finance it” is not correct. An investment yielding 50% WILL earn a profit using hard money borrowed at 22%.
I do understand the concepts being discussed here and will again make the statement that you are comparing two dissimilar things. Total interest paid is irrelevant if one is comparing borrowing vs. profit on a percentage basis. I got the feeling from one of your other posts that you think I don’t understand how compounding works. I can assure you I learned this lesson at a very young age, back when savings accounts at banks paid 10% interest.
What if I told you that you could borrow money at 22% compounded monthly, and earn a yield of 24% on a borrowed amount of $100 million for 4 years? Assume no risk just for the sake of argument. You had better jump on this deal because it will net you a huge profit (millions of dollars). But with your “total interest paid” approach this would be a bad deal, because you’re thinking the true cost of borrowing would be astronomical. This approach does not consider leverage, nor time value of money among. Heck I’d borrow money at 200% interest if I could earn a greater return, after assessing the risk and likelihood of collecting the incoming cash.
50% yield is PER ANNUM. Not 50% profit over the course of 4 years. 50% yield on 7000 invested for 48 months gives a monthly inflow of money of $339. In four years the total profit is $9297. That’s on top of the principal returned of 7000. That’s $5737 in the black. That’s if you only yield 50%. Many Lonnie deals yield far more than that.
That said, I still don’t think the guy should borrow at that rate.
I agree with a lot of what you say - Posted by Marty (MO)
Posted by Marty (MO) on July 12, 2005 at 16:33:38:
but it looks like you’re not arguing about the same thing. The apples are the profit you’re computing and the oranges are the yields other people are calculating.
Nobody can win an argument when people are arguing different points…
When I mentioned " more than 50%" I was referring to total interest paid relative to amount borrowed, not yield. I’ve gone back over the discussion to this point & don’t think the hypothetical deal in question had a yield.
If you’ve got a real deal for me w/a 50% yield over 4 years I’ll reconsider my decision to switch from REI to truck lending–
Absolutely correct, kid! A yield is calculated as an annual percentage, but doing a one-time deal may not result in a stream of $$$ over the term of the truck loan. Though I may not have achieved it, my intent was to clarify why I try to think 1st in terms of actual DOLLAR$ when I calculate in-go (profit) & out-go (cost). By thinking in terms of real money in the pocket or going out-of-pocket you don’t need a financial calculator to know if a deal is profitable or not. Statistics (numerical descriptions) may or may not be useful. Some additional figures (e.g., yield) are extremely useful, but the basic knowledge that there’s more money coming in than out is critical. If the total cash flow isn’t going in the the right direction, the deal doesn’t work no matter how you calculate success–
Tye (who thinks that in addition to Latin & Typing, Compound Interest should be a requirement in high school)
I closed a deal today at 18% and 2 points and I?m tickled pink because I walked away from a two part deal with cash in hand and positive cash flow to boot.
Bought the home for $1500 cash, rehab cost just shy of $1950, and labor ran me $750 for a total of $4200. Sold the home three months ago for $8500.00 with $500 down, 14.54%, and 275.53/month for 36 months for a solid yield of 80.8% on my money.
Today I sold a 24 month partial on this home to another investor for 18% and 2 points which gives me $3675 more to work with plus I?ve already collected 3 payments on this home for a total cash back on the deal of $5001.59 and I?ve got a cash flow of 88.31 for the next 24 months plus 8 more payments of 275.53 in the end.
Ok, in you opinion I?ve over paid on the interest charges! But in reality it?s only going to cost me around $750 total to use this money, and I can turn it into a new deal that will most likely bring me a couple thousand in profit. The difference is having the discipline to sink borrowed money back into an investment instead of buying the new big screen, for what it?s worth, my two cents is for this guy to take the money do a couple of deals and plow the profits back into the loan or new homes!
Re: I agree with a lot of what you say - Posted by Marty (MO)
Posted by Marty (MO) on July 12, 2005 at 22:33:01:
whatever works is good. I think yield’s a very effective way to evaluate a deal, but it’s hard to calculate the intangibles with a leveraged deal. it’s easy to figure out if a deal will work on paper, but the only thing I see that’s guaranteed is the finance company is owed 22%. The 100% return on the Lonnie deal isn’t guaranteed.
Take care-
Marty (the guy who thinks Latin’s a dead language, a monkey can learn to type, and compound interest should be a requirement starting in 6th grade!)
we’ve done similar deals and I think - Posted by Marty (MO)
Posted by Marty (MO) on July 12, 2005 at 22:39:19:
they’re excellent- however, this can be very risky. Your quote, “The difference is having the discipline to sink borrowed money back into an investment instead of buying the new big screen…” is spot on, but with leveraged deals, you also have to bank on your buyer having the discipline to pay their obligation to you.
The reason I believe Latin is useful is because not only does it make it super easy to understand or learn any of the Romance languages (e.g., French, Spanish), it allowed me to ace my college boards in English. As an anthropologist (retired) I can tell you that monkeys don’t type; however, a rare ape may communicate in some ways a special keyboard. What is important is that a human spending a single semester in typing class w/forever avoid a lifetime of hunting & pecking. In assessing the last 4+ decades of my post-hs life, those are the 2 classes that have been of the most value to me over the years. In college I think the most interesting & useful class was physical geology–& THAT should definitely be a requirement for anyone planning to buy RE in Calif! Agree w/you that the joys & evils of compound interest cannot be taught too early.
Marty,
I don’t worry about the buyer’s dicipline. I try to get a decent down (at least 1K in most cases) and if they don’t pay I get them out and move on to another buyer. I have homes I’ve sold 4 and 5 times (Lonnie’s “Money Pump”) so I don’t think it’s really much of an issue.
Lyal
Re: I agree with a lot of what you say - Posted by Marty (MO)
Posted by Marty (MO) on July 13, 2005 at 09:17:22:
well, obviously learning Latin or any other subject is going to enrich your life. My beef with Latin is that I was married in a Latin mass, couldn’t understand it, so I’m sure I was scammed somehow in an elaborate conspiracy. I’m still investigating. I have benefited from Ms. Lilly’s 7th grade typing (I’ll never admit it to her, though). I really think typing is an easy skill to master on your own.
My big question… being an anthropologist, are you investing in mh’s for financial or academic reasons? If it’s academic, we have a couple buyers you may want to check out.
Re: we’ve done similar deals and I think - Posted by Marty (MO)
Posted by Marty (MO) on July 20, 2005 at 10:23:30:
I agree with what you’re saying, but we may be talking about two different things. If we own the home free and clear and haven’t leveraged it to the hilt by selling partials, borrowing against it, etc, I think it’s easy to create the “money pump.” However, if you owe an investor $200 month for the home and the park gets $250 for lot rent, this can get risky in a hurry. If the buyer skips a full month of not paying and it takes 2 weeks more to get them out and then the front door needs to be repaired because he was drinking and kicked it in…
On a highly leveraged deal, you’re not out just $700 for the park and fixing the door (plus your $400 lost income), now you owe an investor $400 (or whatever)…
I just wanted to point out that leverage has its place and I think it’s wonderful if used prudently. We paid holding costs on 5 homes in Feb- this slaughtered our profits as it took 7 other notes to pay the bills… After investors were paid, lot rents, etc. our yields looked thin on those homes. If these would’ve been our first 5 deals, it may have soured us on the business.
I’m only trying to say that the Kiyosaki “good debt” lesson should be applied with care when leveraging high risk notes. I’m not trying to dissuade anyone from selling partials, borrowing against their home or pension, setting up a line of credit, or borrowing against their notes (which is what you do?)- We plan on continuing to use leverage to maximize deals… I just think overleveraging at the start could create an expensive, painful lesson.
You know how to take back a home quickly to minimize your losses- it took us 10 deals before we had to walk through the process. I doubt most of the newer investors can stop the bleeding quickly.
Again, I agree with you that it’s not much of an issue for someone with a handful of deals under their belts, but for a new lonnie dealer, I think they should be careful.
See, you shoulda taken Latin, kid! You are correct about the typing, my DGS taught himselt to type w/a computer program (also taught himself to read music & play the piano & is now studying composition in college).
Your comment about Ms. Lilly’s 7th grade typing class gave me a flashback to my introduction to typing back in the 1950’s when I used to sneak Corn Nuts in class & the instructor would stalk the classroom, his voice ominous, “I smell CORN NUTS . . .” I never got caught, but nearly half a century later can still savor the sensation of sucking on a Corn Nut, trying to resist crunching the morsel in my mouth.
No, I no longer study H. sapiens, or any other primate species, as am long-since retired. Wasn’t even supposed to be involved in investing again @ this point, but the recent unsolicited sale of one of my properties necessitates that I become active again to reinvest my $$$.