Using Amortization Calculators For Fun and Profit

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One of the greatest tools in figuring out how to structure profitable transactions either inside or outside of your Self-Directed IRA is the amortization calculator. If you understand how to use this tool you can analyze a situation to figure out the best way to structure a deal. 

In a standard amortization calculator there are five fields – 

  • Principal Amount
  • Interest Rate
  • Loan Term
  • Number of Payments Per Year
  • Payment Amount

If you know the data to input into four of the five fields, you can solve for the fifth field. Most people just use an amortization calculator to enter the first four factors to solve for the payment amount. But you can do so much more.

Let me give you just a few examples of how to use a simple amortization calculator to make money by investing in promissory notes.

Example 1

You have the opportunity to purchase a promissory note at a deep discount but you don’t have enough money to do the deal in your IRA. How can you structure a transaction using information gleaned from an amortization calculator to attract a money partner to help you fund the deal?

Suppose you can purchase a deeply discounted promissory note but your IRA only has $250 available to invest. The note has the following terms:

Principal Balance: $30,000

Number of Months Remaining on Loan: 80

Interest Rate: 7.75%

Number of Payments Per Year: 12

Payment Amount: $481.36

You can purchase the note for $21,000, but to do so you will need to raise at least $20,750 to complete the transaction. If you can find another investor who is willing to accept a 10% or more return on his money, you can use an amortization calculator to figure out how to structure a joint venture with your money partner. 

In this case you are buying an existing loan, so the terms don’t change for the borrower. The borrower owes $30,000, but you and your money partner are only paying $21,000 for that stream of payments. One offer you could make to your money partner is that he would receive his investment back first with 10% interest. When he is paid back, your IRA keeps the remaining payments on the loan. You make the following entries into your amortization calculator – 

Principal Balance: $20,863.02 (the amount your money partner invested)

Interest Rate: 10.0% (the yield your partner wants on his money)

Payment Amount: $481.36

Number of payments Per Year: 12

Solve for Loan Term: 54 months

There are 80 payments on the note, but it only takes 54 payments to amortize $20,863.02 at 10% interest. Your money partner gets what he wants, and your IRA keeps the remaining 26 payments of $481.36. Of course in this scenario your IRA must wait 55 months for the payments to begin, but it only has $250 in the deal.

Example 2

As an alternative to the scenario above, you and your money partner can share in the entire 80-month stream of payments. Since your money partner requires a 10% yield on his investment, the amount of the monthly cash flow allocated to him is calculated as follows – 

Principal Balance: $20,863.02 (the amount your money partner invested)

Interest Rate: 10.0% (the yield your partner wants on his money)

Number of Payments Per Year: 12

Loan Term: 80 months

Solve for Payment Amount: $358.35

Since the amount due to your money partner is $358.35 but the payment on the loan is $481.36, your IRA receives the difference of $123.01 per month. It takes just over 2 months to get the IRA’s money out of the deal, and the rest is pure profit. Then simply rinse and repeat!

Example 3

An investor can buy a house for $27,000, and he has a buyer lined up to buy the property for $48,000 with seller financing for $44,000. The investor calls you up and asks if you know anyone who will loan him $31,000 to purchase the property and take a little cash out. You find someone who is willing to fund a first-lien loan of $31,000 as follows – 

Principal Amount: $31,000

Interest Rate: 7.75%

Loan Term: 103 months

Number of Payments Per Year: 12

Payment Amount: $414.16

A wraparound loan is created in the amount of $44,000 as follows – 

Principal Amount: $31,000

Interest Rate: 7.75%

Loan Term: 180 months

Number of Payments Per Year: 12

Payment Amount: $414.16

Using your amortization calculator, you figure out that it takes approximately the same amount per month to amortize a loan of $44,000 at 7.75% interest for 180 months as it does to amortize a loan of $31,000 at 7.75% for 103 months.

In exchange for bringing the $31,000 first-lien lender to the table, the investor agrees to sell your IRA one-half of the wraparound note for $500. Since the wraparound note includes the payment due on the first-lien loan of $31,000, the wraparound lender receives nothing until the first-lien lender is paid off in 103 months. However, the IRA receives half of the remaining 77 payments of $414.16. In this scenario the IRA paid only $500 for half of the wraparound note with an initial wrap equity of $13,000 (the difference between the balance on the wraparound $44,000 second-lien note and the $31,000 first-lien note). This was a bit risky for the IRA because it received nothing for eight and a half years, but it had relatively little in the deal, so it was worth the risk.

Are you intrigued by these examples? Similar descriptions of these and other transactions are contained in the book Self-Directed IRA Secrets Revealed. Buy the book today by clicking on the button here [with link to purchase page].

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