The article and the above video talk briefly about yield and discount when buying notes. Investors often get fixated on discount, when it’s the yield that is important to long-term success.
It is a rather important subject, because buying a note at a discount—even a steep one—does not guarantee a certain yield or return. They are two very separate things. Remember, yield is the interest rate your money is earning on an annualized basis. In most performing note transactions, whether you’re buying, selling, or holding one for cash flow, using yield as the method of measurement is almost always the best metric to decide whether the investment was a wise one.
Yield is the ideal way to calculate the return on note investments because it takes into account the rate the money is being returned to you (in the form of periodic payments) and also the entire term of those payments.
Why Is Knowing Yield Important?
Being able to effectively calculate yield will increase your financial knowledge—and also elevate you into the realm of the few folks who actually know what their investments are earning. Yield is different from other calculations such as ROI, Cash-on-Cash, and Internal Rate of Return. Many people mistakenly believe that because they buy a note at a large discount the yield will automatically be high. This is incorrect. If the face value of the note the borrower is paying on is low, say 2-4%, you can still have a horrible yield return.
While a discount is great when you can get one, don’t get hung up on the amount of the discount. Focus on the yield. Several things can influence the yield on a note:
- interest rate
- payment amount
- number of payments remaining
- purchase price (price you are paying)
- method of amortizing (if it has a balloon at some point)
Changing even one of the above variables slightly can and will change the yield drastically. This is important for you to know as buyer, seller, or investor. As you may imagine, yield can be challenging to calculate by hand. If you’d like to learn how to calculate yield for yourself, please request a free copy of my book Paper Profits. Chapter Ten shows you how to do this.
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(This article is an excerpt from Joshua N. Andrews Book titled Paper Profits – How to Buy and Profit from Notes a Beginners Guide)
Request a free copy mailed to you by clicking here: http://notablefund.com/paper-profits-book-request