Posted by drew on January 14, 2000 at 14:27:48:
…is that it is set up to fail. However, you did provide a very good example of why yield should not be the lone focus of an investor (i.e. Profit Matters! If I gave someone a penny a day for no reason they would have an infinite return, but a real skinny wallet).
Let me provide a more realistic example:
Commission (receivable) Amount: $3,000
Advance: $2400 now, $300 upon closing ($300 profit)
Receivable due in 60 days
Yield = 72%
Annual profit of about $1,800 from the original $2,400.
The actual default rate (not repaid within 30 days of schedule) is about 1% (1 out of 100). Let’s assume that the 1% is a total loss (in actuality the “total loss” percentage is closer to 0.25%) and we don’t get a dime back, then the yeild drops to 67%. If the default rate doubles to 2%, then the yield drops to 61%.
In the case of default one can just approach it the same way John teaches restructuring a balloon payment.
As for your statement that:
“There’s a lot more profit to be made in buying a 30-year note than in buying a 3-month note and most 30-year notes will be much safer because they are secured by real property.”
This borders on the “Cash Now” vs “Long-term” income debate I’ve been watching on NG1. Hmmm, care to give an example???