What is Lonnie talking about? - Posted by Brett

Posted by Joe C. on May 10, 2001 at 23:07:06:

Yes, a 67% yield will “yield” \$670 annually on a \$1000 investment that remains in play at the full amount.

The financial calculator steps outlined in previous posts will reveal the true yield (before taxes) as the principle declines each month with an amortized note.

To repeat them: enter (some calculators you enter
number first then letter)
N…30 (30 month note)
I…12 (12% annual interest)
PV…\$4500 (loan amount)
Solve for PMT.\$174.37
then:
N…30 (same 30 months)
PMT.\$174.37
PV…\$2500 (what you actually have
invested)
Solve for I…67…% (the actual interest
you are getting because
you only have \$2500 in
play at the beginning not
\$4500)
This is important because you won’t know how to increase your yield unless you can calculate it with different scenarios. For instance, you can further increase your yield by offering a discount to borrower on the face value of the note in the future in exchange for a quicker return. Of course, this only helps if you put the money right back into play on another note.

I know there are books out there, search previous posts. The only one I’m familiar with is “Invest in Debt” by Jim Napier. It’s written simply. He goes into great detail about improving yield on existing notes. I found it valuable.
Joe C.

What is Lonnie talking about? - Posted by Brett

Posted by Brett on May 08, 2001 at 19:56:02:

In Lonnie’s book “Deals On Wheels” on page 100, he gives details on a mobile home deal. It goes like this:

A home is bought for \$2500 plus another \$500 for miscellaneous costs. It is then sold for \$5000 with a \$500 down payment. A note is taken back for 30 months at 12% interest for the remaining \$4500 which comes out to \$174.37 per month. Lonnie says at the top of page 101 that this is a 67% return. How? I have the financial calculator that everyone has to figure yields. I have punched in the numbers for two days trying to figure out where the 67% yield number comes from. I cannot figure it out. Does anyone know how to do this? Also, what does he mean by 67% yield? Is that his annual return? It cannot be. His overall return after 30 months would be nearly 100%. Anybody got an answer?

Thanks,

Brett

Re: What is Lonnie talking about? - Posted by Bill ( OH )

Posted by Bill ( OH ) on May 10, 2001 at 22:48:13:

Thanks david that works on my ba2 plus texas instruments calulator. Bill.

Re: What is Lonnie talking about? - Posted by Jeff (Al)

Posted by Jeff (Al) on May 10, 2001 at 17:13:45:

Brett,

This is kinda long, but here’s the numbers to show you how Lonnie gets a 67% yield. Key in the following into the financial calculator:

PV = -2500 (amount Lonnie has in the deal)
PMT = 174.37
n = 30 (months)

Solve for i. On my HP-12C, I get back 5.62%. This 5.62% is the periodic interest rate that Lonnie is earning on the deal, ie. the monthly interest rate. Lonnie gets to the 67% Annual yield by multiplying this number by 12 (12 * 5.62 = 67.48% Annual Yield).

Now you CANNOT take the 67.48% and mulitply it times the \$2500 investment and get any results that make sense. This is because the principal balance is declining with each payment that is received. The best way to understand the 67% is to look at the amortization schedule and calculate the interest received over a 1 year period versus the Average Principal Balance for that Year. For example, looking at the amortization schedule below, you see that:

Interest rec’d for Months 1 thru 12 = \$1534.85

Calculate the Average Prin. Bal using the \$2500 initial investment for Month 0 then add in the next 11 Months ending balance, should get

Avg. Year 1 Principal Balance = \$2274.51

NOW if you multiply the Annual Yield (67.48%) times the Average Year 1 Principal Balance it SHOULD equal the amount of Interest received for the first year:

.6748 * \$2274.51 = \$1534.84 in interest received. As Lonnie would say GOOD ENOUGH!!.

Can then repeat for Year 2 making sure you use the Principal balances from Months 12 thru 23 and Only the interest received in the next 12 months and it should come out right on 67.48%.

Hope this helps clarify the numbers.

AMORTIZATION SCHEDULE

Principal borrowed: \$2500.00
Annual Payments: 12 Total Payments: 30
Annual interest rate: 67.48% Periodic interest rate: 5.6233%
Regular Payment amount: \$174.37 Final Balloon Payment: \$-0.52
Note: the following numbers are estimates. See the amortization schedule for more accurate values.
Total Repaid: \$5230.58
Total Interest Paid: \$2730.58
Interest as percentage of Principal: 109.223%

Payment Principal Interest Cum Prin Cum Int Prin Bal
…1…33.79…140.58…33.79…140.58…2466.21
…2…35.69…138.68…69.48…279.26…2430.52
…3…37.69…136.68…107.17…415.94…2392.83
…4…39.81…134.56…146.98…550.50…2353.02
…5…42.05…132.32…189.03…682.82…2310.97
…6…44.42…129.95…233.45…812.77…2266.55
…7…46.91…127.46…280.36…940.23…2219.64
…8…49.55…124.82…329.91…1065.05…2170.09
…9…52.34…122.03…382.25…1187.08…2117.75
…10…55.28…119.09…437.53…1306.17…2062.47
…11…58.39…115.98…495.92…1422.15…2004.08
…12…61.67…112.70…557.59…1534.85…1942.41
…13…65.14…109.23…622.73…1644.08…1877.27
…14…68.80…105.57…691.53…1749.65…1808.47
…15…72.67…101.70…764.20…1851.35…1735.80
…16…76.76…97.61…840.96…1948.96…1659.04
…17…81.08…93.29…922.04…2042.25…1577.96
…18…85.64…88.73…1007.68…2130.98…1492.32
…19…90.45…83.92…1098.13…2214.90…1401.87
…20…95.54…78.83…1193.67…2293.73…1306.33
…21…100.91…73.46…1294.58…2367.19…1205.42
…22…106.59…67.78…1401.17…2434.97…1098.83
…23…112.58…61.79…1513.75…2496.76…986.25
…24…118.91…55.46…1632.66…2552.22…867.34
…25…125.60…48.77…1758.26…2600.99…741.74
…26…132.66…41.71…1890.92…2642.70…609.08
…27…140.12…34.25…2031.04…2676.95…468.96
…28…148.00…26.37…2179.04…2703.32…320.96
…29…156.32…18.05…2335.36…2721.37…164.64
…30…165.11…9.26…2500.47…2730.63…-0.47

Hope this helps!!

Jeff

Re: What is Lonnie talking about? - Posted by Wayne (MD)

Posted by Wayne (MD) on May 10, 2001 at 05:49:13:

I confess I was (and still am) confused by this in his book too and I think the problem is simple ignorance on my part. I am accumstomed to thinking of “return” on ivestment which, to me, is stated in annual terms as so much per year such as 10% or 12% or 18%. If I understand this correctly, the term “yield” refers to just that, the yield and has no regard whether that yield is obtained in six months or six years or 36 years.

I find this somewhat misleading in that it makes it appear you are perhaps getting much more than you really are (although the returns are substantial in any event!).

Methinks Lonnie or some other equally qualified person should clear this up for those of us trying to learn this without having to take a college course in finance (which we probably should).

Wayne

Re: What is Lonnie talking about? - Posted by DougO(NM)

Posted by DougO(NM) on May 09, 2001 at 12:21:02:

Hi Brett
Be sure you are using the right numbers. Put the note infomation in the calculator \$4500, 12% and 30 months. Solve for the payment. Now, the next step is to see what the yield is on your invested capital. If we paid \$2500 and put in an additional \$500, then got \$500 back, we have \$2500 invested in the deal. Without clearing the calculator from the previous calculation, enter 2500 for PV then solve for I. The tells you that the 30 payments of 174.37 you will get from your \$2500 investment yields you 67%

Doug

Re: What is Lonnie talking about? - Posted by John, AZ

Posted by John, AZ on May 08, 2001 at 22:39:59:

Cost of home \$2500.00 plus repairs \$500.00
total of \$3000.00 in home
minus \$500.00 down payment
total of \$2500.00 in home
so you punch in 2500.00 for “PV”
and 174.37 for “PMT”
and 30 for “N”
and then you solve for “I”
and at this point you should get “5.6236”
and then, this is what messed me up, you have to multiply by 12
so “5.6236” X 12 = 67.48%

Hope this helps, frustrated the hell out of me too.

John

Re: What is Lonnie talking about? - Posted by David (OH)

Posted by David (OH) on May 08, 2001 at 20:49:41:

Hi Brett,

I am still learning the calculator a bit myself. But I did figure this one out.

Loan: PV = \$4500 FV = \$0 N = 30 & I = 12% Solve for payment = \$174.37

Now keep FV, N, and Payment the same. Change PV = \$2500 (=2500 Purchase Price + 500 Misc Cost - \$500 Down Payment). Solve for I = 67.48202841568%

Hope that helps. I mostly get messed up with not deducting the down payment received from the buyer.

David

Re: What is Lonnie talking about? - Posted by Joe C.

Posted by Joe C. on May 10, 2001 at 09:35:21:

The yield is simply the “interest” earned on your investment annually.

When you do the calculation as outlined by many here, the word problem you are solving is:

1. If I have \$2500 invested in this deal and,
2. If I collect \$174.37 per month for the next
30 months,
3. How much interest is my money earning
per year???

This calculation takes into accout that the principle balance owed to you is declining each month. The calculation does not include the portion of the “principle” returned each month as part of the yield or “profit returned”.

Joe C.

Re: What is Lonnie talking about? - Posted by Charlie (AZ)

Posted by Charlie (AZ) on May 09, 2001 at 09:30:59:

John,
I’ve struggled with Lonnie’s yield for weeks with my HP12c and I still don’t get it. I understand what he is doing but my calculater doesn’t even come close to the answers he gets. I would very much appreciate you giving me a call at 623-566-9530 and walking me through this if you have time. Maybe my 12c isn’t working right . Thanks in advance.
Charlie

Re: What is Lonnie talking about? - Posted by David (OH)

Posted by David (OH) on May 09, 2001 at 08:49:42:

Brett/John,

Rather than I, my calc has APR (Annual Percentage Rate). I just assumed this was the same as the I for other calculators, but maybe not. I did not have to multiply by 12. I think my calc assumes 12 monthly payments/yr so it adjusts for me.

David

Re: What is Lonnie talking about? - Posted by Wayne (MD)

Posted by Wayne (MD) on May 10, 2001 at 13:36:03:

Joe, thanks very much for your response. This has been a question that has nagged me ever since I got Lonnie’s two books (and Tew’s) and I dearly would like to learn more about these numbers and how they work. Can you recommend a text on learning more about rudiments of interest and lending, etc.?

Just to re-state what you wrote and to make certain I understand this clearly: You are saying that \$1,000 invested will return \$670 in one year at a 67% yield (assuming no prinicipal has been paid). If I understand this correctly, this is a fantastic return – high risk, yes, but seemingly truly worth the risk if you do your homework and follow-through according to the book.

I have held first and second mortgages (I know this seems ridiculous in light of the questions I’m asking), but it never occurred to me investors were making THAT MUCH return! I am genuinely impressed. Mine is an example of how ignorance truly is not bliss.

Thanks again,

Wayne