See all three posts in this series

This week we’ll continue with the scenario from Part 2.

To recap, I’ve bought a note for $20,000.  The terms of the note are as follows:

  • 360-month amortization (48 months have passed)
  • 7% interest
  • $78,500 original balance, ($74,947.52 current balance)
  • $522.26 monthly payment
  • Though the note amortizes over 360 months, it has a 5-year balloon, at which point $73,893.30 will still be owed

Since the borrower doesn’t want to pay the balloon and I like receiving payments, I’m going to extend the note and change the terms when the balloon would have come due.


THE SCENARIO:

a) After one year (at which point the balloon is due), what’s my cash-on-cash return?

b) If the new note is at 6%, amortizing fully over 30 years, the new payment will be $443.03, as determined in Part 2.  How long will it take me to recoup my investment?  (Reminder: In Part 2, we determined that at that point, I only have $13,732.88 into the deal.)

c) If the new note is at 6%, amortizing fully over 5 years, the new payment will be $1,428.56, as determined in Part 2.  How long will it take me to recoup my investment?  (Reminder: In Part 2, we determined that at that point, I only have $13,732.88 into the deal.)

d) At the end of the 30-year note, what will my Internal Rate of Return be for the entire investment?  

e) At the end of the 5-year note, what will my Internal Rate of Return be for the entire investment?

f) If I knew on day 1 (when I pay the $20,000 for the note originally) that I can set up the new note with the 30-year term instead of taking the balloon, and I want to make sure that I make 60% on my money, what would I pay for the note (instead of the $20,000)?

Note: Several of these require the use of Uneven Cashflow analysis. Here is one of our tutorial videos on how to calculate Internal Rate of Return and Net Present Value. You can check out more of our financial calculator video tutorials if you’re interested.


THE SOLUTION:

a)  I invested $20,000, and received 12 x $522.26 = $6,267.12.  My cash-on-cash return is therefore 6,267.12 / 20,000 = 31.34%.

b) It will take me 13,732.88 / 443.03 = 31.0 months (beyond the initial year) to recoup all of my invested money.

c)  It will take me 13,732.88 / 1,428.56 = 9.61 months (beyond the initial year) to recoup all of my invested money.

d) Using Uneven Cashflows, I enter -20,000 initially, $522.26 x 12, and $433.03 x 360.  Solving for IRR/YR, I discover that the Internal Rate of Return for the investment is 27.24%.

e) Using Uneven Cashflows, I enter -20,000 initially, $522.26 x 12, and $1428.56 x 60.  Solving for IRR/YR, I discover that the Internal Rate of Return for the investment is 59.18%.

f) Using Uneven Cashflows, I enter 0 initially, $522.26 x 12, and $433.03 x 360.  Solving for NPV with 60% IRR/YR, I discover that the Net Present Value of the investment is $9,451.47.  So if I wanted a 60% return on my money (to beat the 5-year second loan scenario), I could only pay $9,451,47 for the note initially.

 

So what did you think?  Uneven cashflows aren’t so tough, now are they?  Don’t worry, we’ll do more with those in some future scenario.  

Money Blog – Turning one note into another, part 3
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