how to calculate profit on owner financed sale

[Carlos Santiago]

How do I calculate the rate of return I'm earning on my money when I hold a note for owner financing? Details:

$45,000 (investment = property + rehab)

$58,400 note - 8% int. 5 yr. balloon, $525/mo payments (p+i)

[David Collins]

Congrats on the profitable sale, Carlos!

It's almost always more informative and meaningful to separate "rate of return" analyses into the component parts of the situation. In your case, you've executed two transactions, each of which has its own ROR.

(All of the following is pre-tax calcs, of course.) Transaction One: You bought for 45K and sold for 58.4K. Your ROR on that move depends, of course, on the time interval between these two, but simplistically, it's what's called the geometric mean of those two values. For example, if the sale came exactly three years after the acquisition, your annualized ROR was 9.077%, compounded annually. This is your yield for the 'holding period' of the property.

Transaction Two was your decision to "reloan" or "invest" the 58.4K sale proceeds into an IOU. For this investment, your yield--or ROR--is precisely 8%, as indicated by the note's rate.

I've taken a very important liberty by ignoring risk for the moment. A correct ROR assessment should take into account the possibility of default on the note, and any expectations thereof. But I think that goes a bit beyond what you're looking for here.

I hope this helps, and best of luck!