Assumptions (no, not the RE kind) - Posted by Steve W.


#1

Posted by Berwyn on December 28, 1998 at 11:13:21:

>“Where do I purchase Jim Napier’s book…“Invest in Debt”?”<

You can find all about it at
http://www.kokodir.com/Napier.html

I’ll be calling to order my copy when I log off today.


#2

Assumptions (no, not the RE kind) - Posted by Steve W.

Posted by Steve W. on December 27, 1998 at 14:13:11:

Reading this article from “Cash Flow”, I was struck by how much a seasoned professional in this business ASSUMES we all know. As a newbie, I DO NOT know the meaning of his use of PV and FV in the mathematical examples below. Could someone help me out?

26% Yield
With No Competition
by John D. Behle

ONE OF MY students sent me this example. It’s a good example of a note that many might not be able to calculate, would turn away from, and many funding sources would not buy. Yet, when I can invest some of my money at a 26% yield, I’m happy. The best deals and profits in this industry come through your creativity.
Dear John,
Here’s a note that came in yesterday. Try running this one through your calculator.

The loan is about 2 months old and goes as much as 36 months. The loan is structured with three scenarios. If the loan is paid in full before 24 months, then the note bears 0% interest with no payments (just one lump sum payment). If the note goes past 24 months, then there is an interest rate of 5% that applies for the whole time period and interest only payments from the 24th month. If the note goes all the way to 36 months, then there is an interest rate of 10% that applies to the full amount.

The seller said he is “hoping for $20,000” and would probably just buy the note himself with one of his investment accounts. Others he has talked to convinced him that an 18% yield would be what investors would acquire. Assuming the property and LTV are acceptable, what would you pay for the note?

Frank, January 6, 1998

This note has to be calculated all three ways. You always pay for a note based on the “Worst Case Scenario.” Usually that is the longest term, but with the interest rate twists of this note, you need to calculate all three.
Step One - Identify The Cash Flows

Scenario One - no interest, no payments, paid within 22 months (subtracting the two months that have already passed). There is one cash flow which is $32,250 paid in 22 months (take the longest possible period). This is a lump sum cash flow and simple to calculate. Go to step three.

Scenario Two - 5% interest, no payments for 22 months and then interest only payments and a balloon in 34 months. The cash flows are:

CF1 = payments of X amount beginning in 22 months and payable for 12 months.

CF2 = a lump sum payment of Y amount payable in 34 months.

Scenario Three - 10% interest, no payments for 22 months, interest only payments for 12 months (based on 5% - since the 10% hasn’t kicked in yet), and a balloon in 34 months.

Step Two - Solve For Any Unknown Factors

Scenario One - There are no unknown factors, go to step three

Scenario Two - Since interest accrues for two years on the $32,250, then we have a higher amount and the interest only payment would be based on that amount. The lump sum (balloon) payment in 34 months would be this higher figure. The first calculation shows the amount the loan will grow to in a total of 24 months. N I PV PMT FV
24 5% $-32,250.00 0 ?
24 5% $-32,250.00 0 $35,634.36


#3

Re: Assumptions (no, not the RE kind) - Posted by J.P. Vaughan

Posted by J.P. Vaughan on December 28, 1998 at 08:40:13:

The Cash Flow Forum is devoted to “paper” and it does
assume that the visitors there understand some basics.
(We need stuff for the more experienced folks, too…)

I have written two articles on some paper basics. Look
on our “How-To Articles” page for “A Crash Course on
Discounted Paper” (Part I and Part II).

JP Vaughan


#4

Re: Assumptions (no, not the RE kind) - Posted by MilNC

Posted by MilNC on December 27, 1998 at 19:00:52:

Try this site:

http://fpc.net66.com/

(highlight copy and paste–there is no www in the URL)


#5

Re: Assumptions (no, not the RE kind) - Posted by Steve W.

Posted by Steve W. on December 27, 1998 at 15:47:49:

Thank you for your replies, and I am making every attempt to learn everything I can.


#6

Re: Assumptions (no, not the RE kind) - Posted by Stacy (AZ)

Posted by Stacy (AZ) on December 27, 1998 at 14:47:51:

N= number of payments
I = interest rate
PV = present value (what the note is worth today)
PMT = payment amount
FV = future value (what the note is worth in the future, in this case, in 24 months)

These calculations are done on a financial calculator that has keys devoted to each of these variables. If you know any four of the variables, the calculator will find the fifth. The concept of the “time value of money” is very important and powerful…learn it well.

Stacy (AZ)


#7

Need to start learning … - Posted by David Alexander

Posted by David Alexander on December 27, 1998 at 14:42:04:

how to use a good financial calculator. I have a very
basic one. A Texas Instruments BA that I bought a
Walmart for about 20 bucks. it works fine for me.
PV means Present Value, FV means Future Value, you also
have a PMT key meaning payments, N number of months, and I% meaning interest.

It is essential to start learning about the time value
of money, present value, Future value, the difference
between interest and yield, compounding effects of money, etc. First thing to do is get a calculator as soon as you can and start punching numbers. A good book for calculator gymnastics is Jim Napiers Invest in Debt, and I believe Jon Richards has one available
on this site that is good also.

No one assumes anything except that if you are coming to this site you will investigate as much as you can on your own and then ask questions on what your not sure of.

David Alexander


#8

Re: Assumptions (no, not the RE kind) - Posted by Steve

Posted by Steve on December 27, 1998 at 19:18:32:

Thanks a million, looks like there is a ton of good info here. I’ll get into it.


#9

Re: Need to start learning … - Posted by Lynne

Posted by Lynne on December 28, 1998 at 05:30:41:

Where do I purchase Jim Napier’s book…“Invest in Debt”?

Thanks in Advance,

Lynne