Notes, Interest Income, Yield - please help my math challenged brain!

[Gautam Venkatesan]

I read a lot of posts on BP recommending investing in notes with your retirement funds. I see double digit returns (10-15%) being quoted as common for note investments done correctly. But when I do some simple math with an amortization calculator/chart I do not see where you get 10%+ returns for the life of the note.

Lets take a simple example.

1st position note value $60,000 @ 10% amortized for 15 years (to keep it simple do not worry about LTV, etc. again the assumption is you bought the note correctly whatever those numbers need to be for you).

So if you plug these numbers into an amortization chart you will see in the first year (months 1-12 on the chart) the interest income from the note averages $490/month; let's round up to $500/month or $6,000/year.

So Year 1 cash-on-cash return would be $6000 / $60000 = 10%

Fast forward to year 5 and the monthly interest income on the note, according to the amortization chart, averages $400/month or $4800/year.

Now in Year 5 cash-on-cash return would be $4800 / $60000 = 8%

Fast forward to year 10 and the monthly interest income on the note, according to the amortization chart, averages $250/month or $3000/year.

Now in Year 10 cash-on-cash return would be $3000 / $60000 = 5%

So it seems like the returns on your note investment are decreasing over time,

where are those double-digit returns??? What am I missing???

[Dion DePaoli]

Well your math is wrong.

In year five your capital basis would have also been reduced by principal payments.

Apply the principal reduction to the amount invested and see where you end up in return.