Opportunity Cost - Posted by Tony-VA
Posted by Tony-VA on August 04, 2000 at 07:34:19:
Many times I look at deals from the standpoint of opportunity cost. By this I mean, if I invest this much money in this deal at this yield, it there an opportunity cost to me in which I could be investing the same amount of money in more deals and/or higher yield.
That being said, I also look at deals using my baseball analogy.
Not all deals need to be homeruns. For awhile I would only do deals that exceeded well over 100% yield. These deals are great homeruns. You can also go broke waiting only for homeruns.
So from time to time I do deals that are more like singles than homeruns. These deals may yield closer to 50%. This way I get more deals working, more money coming in and less money sits at the BANK doing next to nothing.
There are ways of increasing the yields on the “singles” also to make them even more attractive. For instance, these maybe deals that I do through my IRA so that the yield is not taxed now (tax deferred, traditional self-directed IRA). Or I may partner with the IRA so that some of the deal goes to the tax deferred IRA and some goes into my pocket and yes gets taxed.
Partnering with the IRA actually is in line with the opportunity cost test. By partnering with the IRA, I take out 1/2 the money (for example) from my pocket and the IRA pays the other half to purchase the home. Since my yield on the out of pocket dollars will be a bit lower than a homerun, I limit the amount of out of pocket dollars I use in this deal. That way I have cash on hand for the next pitch.
Also, in looking back on my last post in this string, I don’t think I made things very clear. I don’t have a calculator with me to show an example but shoot me an email and I will walk you through some numbers.
I will try and answer this specific question better.
“Some of you who think 35% is too low of a yield would readily sell me one of your own notes at 18% or so. Why not create my own, in my own backyard at 35%? Of course I will try to do better but If I cannot, why not? If the note goes bad, then I take back the home and do it again.”
By selling you a mobile home note that will yield YOU 18%, I would receive MORE cash.
By selling you a mobile home note that will yield YOU 35%, I would receive LESS cash.
So yes, we would prefer to sell notes that would yield 18% to you as oppossed to 35% because OUR yield would be greater because the discount would be less.
Buying a mobile home note that would yield you 18% would almost be face value.
I would not recommend buying mobile home notes at or near face value because of the risk involved (repossession, poor credit etc.). Because we are investing in notes of higher risk, we should get higher yields.
So the reason my last post seemed confusing to me was that I needed to clarify better who’s yield we are talking about. The buyer or the seller? That may be where you got lost.
If you hear someone talking about yields, we need to clarify who’s yield they are referring to.
Hope this post is a bit more clear.