Yields? - Posted by Andy(MO)

Posted by DaveWNC on January 31, 2002 at 19:24:15:

I guess 'ole Honest Abe wasn’t so honest after all. A penny saved is ACTUALLY 1.3 pennies earned.


Yields? - Posted by Andy(MO)

Posted by Andy(MO) on January 21, 2002 at 17:56:07:

I have been reading this site daily for the last few weeks and have been amazed by the the yields people are getting on these deals. Then today I realized that these may not be annual yields but total yield. Was I incorrectly assuming that people are getting 75% returns annually. Can someone clear this up for me:)

Be careful on yields (long…sorry) - Posted by Bushman

Posted by Bushman on January 30, 2002 at 16:54:51:

I just started in the business so I can not vouch about how amazing it is quite yet. Just bought our first MH 2 weeks ago, fixed it up, and now trying to sell - I will post later with all the details after I sell (hopefully with a great success story). However, I do have some experience with investing and financial analysis from my “day” job.

I agree the individual yields everyone speaks of are quite amazing, but here are a few thoughts…

  1. Most of the deals Lonnie and others note are before tax consequences. Now, I do agree “Good Nuff” works in this business - that is why I am here. But if you understand the time value of money and put this into your model, the yield drops substantially if you have fork out money this year for income you will collect down the road.

  2. Internal Rate of Returns and Rate of Returns being used to calculate the numbers shown here are a little tricky. IRR assumes you can reinvest your cash flows at the same rate you earn (i.e. if you earn 72% on a particular note, the assumption is you can reinvest at that rate immediately and get those returns). True some of the folks here can do that…they are very good at this business and can reproduce deals quickly. But us beginners are going a little slower and can only reinvest our income at our cost of capital rate in the short term (i.e. what we normally earn in our portfolios). Sorry if I am covering ground you already know, but I see some mistakes on return calculations here all the time.

  3. As a new investor in this field that will not be reinvesting with unlimited deals at this rate, you may want to consider using Modified Internal Rate of Return to calculate you potential yeild. In excel the function is =MIRR() - look in the help for the factors. This calculation takes into consideration your reinvestment rate (or cost of capital rate). This can and will sometimes slice your return in half. As a beginner just learning the business and not being to get the money back into another home that quickly, I find this to be a more realistic calculation.

FINALLY, sorry about the length of this note, all of this is really interesting in the academic sense, but if you are buying for half of what you are selling and creating a note paying 12.75%, as the master would say, “Good Nuff”…

Re: Yields? - Posted by Matt L. (St. Louis)

Posted by Matt L. (St. Louis) on January 23, 2002 at 15:58:45:

Where in Mo are you Andy?

Re: Yields? - Posted by Karl (Oh)

Posted by Karl (Oh) on January 21, 2002 at 20:39:09:

Yes, you were correct, the yields you?re reading about are annual yields. And 75% is probably a little low. My lowest yielding note is about 72%. I?m averaging around 100%, and have many notes with infinite yields. I believe my results are typical for a Lonnie type investor.

Believe what you?re reading, this is an incredible business.

Karl Kleiner

Re: Be careful on yields (long…sorry) - Posted by Andy(MO)

Posted by Andy(MO) on January 30, 2002 at 18:29:38:

Bushman, that was a great post in my eyes. I have had many similar issues with a lot of the yields posted here. After a short time i realized taxes had huge consequences on the yilds? That was my first epiphany. I then realized that these 75+ returns were the yields on the initial cash invested which is very different than and IRR. I got very excited when I thought I could earn 75% on one deal compared to 10-12% in the stock market. I have never used excel to make calculations, I have always used my TI-BAII. Just curious, what do you do for a living. I am a recent grad with a degree in Fin. and RE. I can’t try any of this creative stuff till I get a job. Keep me posted on your first deal. Thanks for your reply.

Ditto that for me (nt) - Posted by Jacque - WA

Posted by Jacque - WA on January 21, 2002 at 21:06:14:


Re: Be careful on yields (long…sorry) - Posted by Bushman

Posted by Bushman on January 31, 2002 at 08:57:09:

Hi Andy,

Thanks for the reply. I am a Corporate Finance guy for a VERY large auto company in Detroit.

The numbers are quite amazing, nevertheless. Actually, in this analysis RoR and IRR are the same calcualation and the numbers of 75+% are correct - so long as you can reinvest at that rate.

The calc is based on how much of your own money you have left in the note after sale - not the initial cash outlay for the purchase (maybe I misinterpreted your response???).

The job market is tough right now, no doubt. But don’t let the fact you don’t have a job slow you down. I try to think of it like this. For every discretionay dollar you spend with after tax funds, you have lost $1.30 opportunity in buying an investment. With a business like this, you play with before tax dollars and only consider the profits as after tax dollars.

Confusing, yes, but in short, when I am low in cash, I just stop spending. I stop eating out. I stop drinking beer (somewhat). I shut down the consuming in order to keep investing. You may have more money than you think to start doing Lonnie deals, just start looking at the spending habits and see where you can cut back in order to invest…

Thanks and make sure you take advantage of all the archives here - they are priceless and everyone is willing to help as long as you take some action. One last piece of advice, if you are stagnating a little and have not bought that first mobile, find a friend that is just as ambitious as you and get them involved. I am doing these deals with a partner and we feed off each other. Kind of like a mini support group…