Everyone has heard the expression Time is Money. Nowhere is that more true than in real estate investing. For instance – every day that goes by during a rehab job is costing an investor interest on borrowed funds.
But smart and savvy investors can use time to make lots of profits. Not only profits, but the best kind of profits:
Passive profits.
What do I mean by passive profits? I mean the kind of profits where all you have to do is go to your mailbox and pick up a check once a month. No overflowing toilets, no dealing with contractors, no driving out to properties to deal with a domestic dispute.
Think about it… when you purchase a property with bank money, does the bank do anything except lend you the money and collect payments? Nope.
Wanna be the bank?
One way to invest in real estate is to be the bank, not the owner of the property.
There are lots of lessons here at Mogul explaining how to work with private lenders, but why not be a private lender? Don’t have the money? Find a private lender and broker the deal.
This tech lesson is not meant to teach you to become a hard money lender or to buy discounted notes. Instead, our aim is to show you how to use a simple, cheap calculator to unlock huge amounts of profit potential when analyzing mortgages, deeds of trust, owner financing, etc.
The math we want to teach you is not taught in a lot of schools, and many bankers don’t understand it well. But boy is it profitable if you know how to use it! And you don’t need a sophisticated computer or a PhD in Applied Multivariable Calculus to do it.
What you do need is a FINANCIAL (not just a regular) calculator such as the Hewlett Packard HP-12C or Texas Instruments BA-II Plus. These are very inexpensive calculators, but they can do all the number crunching you need to make a fortune in discounted notes. When you buy the calculator, make sure you take the time to look through the manual and become acquainted with all the financial keys.
These days a calculator may not seem so ‘techie,’ but once you find out the power of the financial keys, you won’t necessarily feel bad about using a low-tech device.
Become a TVM master.
TVM is ‘Time Value of Money.’ Most investors know what a mortgage amortization table looks like. The tables have the payments you make, the interest and principal for each payment, and the remaining amount of money that needs to be paid on the mortgage.
What a lot of people don’t know is how to calculate it.
That’s what this lesson will teach you. Even if you don’t buy discounted notes or lend money out, you can still calculate how much you have left to pay on your own loans and double check what your lender tells you.
Want a quick lesson?
Once you are familiar with your financial calculator, put these titles on a piece of paper:
N I/Y PV PMT FV
Here is what they mean:
-
N = Number of payments left on the loan (note, mortgage, deed of trust, etc.).
-
I/Y = Interest rate per year. If you have monthly payments, you should divide your annual rate by 12 to get the monthly rate. Do this division right on your calculator if the answer is not obvious (12% annual interest is obviously a 1% monthly rate).
-
PV – Present value. This is the amount of the loan. It is always entered in the calculator as a negative number to signify that this is money going out of a bank to be loaned.
-
PMT – Your monthly payment on the loan, including principal and interest – or maybe just interest for interest-only loans.
-
FV – Future value. The amount of the loan when it is paid off. For a normal amortized loan, this value is 0, meaning the loan is paid off when all payments have been made. But if there is a balloon payment, or if the loan is interest only (FV=PV), then you will have to either put a number in for FV, or use the calculator to calculate a number.
That’s about all you need for TVM. Pretty much all problems involving mortgages can be broken down into these 5 numbers. As the investor all you have to do is gather data for four of the five, and use the calculator to figure out the last one.
How’s about an example, class?
Suppose you want to calculate the balloon amount you will have to pay in 5 years (60 months), on a $60,000 loan with 8% annual interest (8%/12 is 0.6667% monthly interest) and payments of $440.26 per month. The payments are based on a 30-year amortization schedule, but what is left after 5 years will have to be paid off all at once:
-
First of all clear your calculator of all financial numbers. These calculators remember what you last put in, even when you shut them down. If there are old numbers for any of these variables, it may screw up your calculation.
-
Then put in the numbers you do know, followed by the appropriate financial key (N, PMT, etc.). It might make sense to start by writing the numbers out on a piece of paper like this:
N I/Y PV PMT FV
60 0.6667 -60,000 440.26 ? (need to calculate)
If you enter the numbers right, you should see something like ‘N=60’ on the screen.
-
Hit the CPT (‘Compute’) or similar button and then hit ‘FV’ and you will find out the amount of your balloon payment ($57,041.91).
It is always good to verify what the bank or lender tells you.
So what? That doesn’t make me rich!
Once you master the basics of TVM, you can look at adding discounted notes to your Mogul portfolio. Just like real estate investors like to find ‘motivated sellers’ of properties, note buyers like to find motivated note sellers.
Another example...
Suppose Joe Seller has a note on a house he sold when he couldn’t sell it the old-fashioned, bank-financed way. To make it simple, let’s use the same numbers we used in the example above. Joe is willing to take a discount on it in order to have cash for his divorce lawyer. You come in as the note buyer and figure you want a 25% return on your investment. So you use your calculator to figure out what you would be willing to pay:
-
Write down your numbers on a piece of paper:
N I/Y PV PMT FV
60 25/12=2.08 ? (calculate) 440.26 $57,041.91
-
Enter the values in your calculator.
-
Hit the ‘Compute’ button and then the ‘PV’ button.
-
$31,553.64 is what your offer should be to get a 25% return on your investment (if you are off by a few dollars, it may be a rounding difference with your calculator and can be ignored).
You just bought a $60,000 note for $31,553.69 – a $28,446.31 discount! Just by using your calculator! Do you get 25% returns on your flips and rental properties? Probably not. But instead of a tool box, lots of trips to the hardware stores and frustrations with rehabs, all you need is a calculator and some money to fund the deal.
If you don’t have money, find a private lender and broker the deal to him or her. You could sell it to the private lender as a 15% return and use your calculator to figure out what the Present Value (PV) would be for 15% ($45,576.39). Then you just pocket the difference between the 25% PV you bought it for ($31,553.64), and the 15% you sold it to the lender for – a profit to you of $14,022.75 ($45,576.39-$31,553.64). Not too shabby.
That’s how this math can make you rich!
Holla at us
Are you a TVM master? Has it helped you make deals? We wanna hear from you in the comments section below.
Learn to Use a Financial Calculator – No matter what type of real estate investing you do, knowing how to calculate payments, interest rates and loan balances is important for your success
Learn about TVM – There are so many hidden profit opportunities in buying discounted notes and mortgages. The reason there are so many profit opportunities is because very few people understand this concept, but almost everyone has loans. Master the subject and you will add a powerful weapon to your real estate investing arsenal.
Consider Becoming a Hard Money Lender (HML) – You can use money from your IRA, money in savings, or be a broker for other people’s money. Smart investors look for lots of different ways to make their money work for them, instead of the other way around.