Yield differences between my money and borrowed? - Posted by Barry (Or)

Posted by Stu on June 03, 2005 at 10:41:16:


Your #'s look right to me. First, smaller #'s always look less impressive. Take a look at a 21% spread on a 112,000 note as opposed to an 11.200 and see how it looks then. I think what you are missing is the fact that since you have borrowed the full 7200 to purchase the note, your yield on your $$ (your cash that is) isnt 33%, its infinite due to leverage and having none of your own $$ in the deal like when buying a home no $$ down.
33% would be the yield on your cash if you came out of pocket for your 7200. Since I was bored I decided to figure what would happen if you used $1000 of your own and borrowed 6200 at 12%. your yield then on your cash is an impressive 55.7% and thats the power of leverage, a 66% increase in your yield.

Hope this helps,


Yield differences between my money and borrowed? - Posted by Barry (Or)

Posted by Barry (Or) on June 03, 2005 at 09:32:29:

I don?t think I understand the time value of money as well as I thought.

If I create a note between a buyer and a seller 10% then I buy the note at a discount my yield is 33%.

Here are the numbers. 14,000 with a down payment of 2,800. The financed amount is 11,200 and monthly payments are 257.60 for 54.2 months. If I pay 7,200 for the note and it is my money I get 33% yield.

If I borrow the 7,200 at 12% my payments for the same amount of time come to 172.69 / month.

But that only leaves 84.91 profit for a 21% spread?

It seems like I should have the majority of the money left over since the overall yield is 33% and I am only borrowing at 12%.

What am I missing? Are my numbers right?