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Selling part of a note - on terms

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Note: You can use any financial calculator to do this problem, but if you want the BEST, you can get our 10bii Financial Calculator for iOS, Android, Mac, and Windows!

THE SCENARIO I've been thinking recently of how to help investors get started when they have a month-to-month surplus but haven't yet accumulated a pile of cash to buy a property, business, or other investment. I'm also interested in note investing - that is, buying a payment stream such as a mortgage for a lump sum now in order to get payments coming in over time. Say I have a note that's going to pay me $900 per month for the next 154 months, and I want to sell part of those payments to an investor, Tom, who's just starting out. Tom's going to pay me some amount of money each month for the next 5 years, and in return, he's going to get half of each of the payments in the note that remain after the 5 years. Tom wants to earn 10% on his money. The question is, how much does Tom give me each month for the first 5 years to buy half of the note payments after 5 years?
THE SOLUTION This one is a little tricky, because it has two major sections: the first 60 months in which Tom pays me some money, and the last 154 - 60 = 94 months in which he gets half of the the $900 note payment (meaning that he gets $450 for each of those 94 months). First, we'll figure out how much Tom's income-producing payment stream will be worth to him on the day it starts. Second, we'll figure out how much Tom's payment to me would have to be over the first 60 months to make his investment worth that much when he's done paying. Step 1 First things first, make sure the calculator is using 12 Payments per Year. N: 94 (Tom collects payments for the last 94 months of the note) I/YR: 10 (Tom wants to make 10% on his money) PV: (this is what I'm trying to find) PMT: 450 (Tom's buying half of each of the $900 payments) FV: 0 Tom's income stream is worth -$29,248.24. Thinking of it another way, if Tom invested $29,248.24 and received $450 per month for 94 months, he'd make his target 10% on his investment. Step 2 N: 60 (Tom pays out for the first 60 months) I/YR: 10 (Tom wants to make 10% on his money) PV: 0 PMT: (this is what I'm trying to find) FV: 29,248.24 (At the end of the 60 months, this is what Tom's investment is worth)

Tom's net payment is -$377.70 for the first 60 months. At the end of those 60 months, his investment will be worth $29,248.24, which he'll receive as 94 payments of $450 per month (which we saw in Step 1).

When all's said and done, Tom's cash flow diagram would look like this:

You may ask "Why would you sell part of your note so cheaply? What's in it for you?" That's a fine question; I would do a deal like this for several reasons.

First, I'm helping a new investor to get into something that'll provide him with a healthy return and some decent (if deferred) passive cash flow. And I honestly like helping people.

Second, doing this might improve my own return on the deal, depending on what it cost me to acquire the note in the first place. If so, then it's not like helping Tom is costing me anything - quite the contrary, in fact.

Third, I might be in a tight cash flow position right now, where having an extra $377.70 per month would help me out, and I expect my cash flow to improve within 5 years. If that's the case, then it might help me to give up a bit of cash flow in the future to get more cash flow now.

Plus, as one of my investing mentors likes to say, "Investing is a team sport," and as with any kind of team sport, you have to build your team, and get used to working with them. If you've never done a small deal with someone in the past, it's much harder to do a big deal with them in the future - both in terms of the resources you can all contribute to the deal, and in terms of the trust and confidence you have in one another.

What do you think? Would you ever buy part of a note on terms? What about selling part of a note that you own? Let us know in the comments!