Note investing short vs long term lending

[Logan Turner]

Following the reading of invest in debt, the author is a big proponent for borrowing long and lending short. I’d like to gather some thoughts from other savvy paper investors on this subject. When I create a note is it more advantageous to create a 10-15 year mortgage vs a 30 year mortgage? The 10 year mortgage would produce on a 50k investment selling for 90k at 10 percent 32% ROÍ and a total return of 161,468 over 10 years. This is an actual net of 111k or 11k/year. The 30 year mortgage given the same numebrs: 19% ROÍ for 30 years and a total return of $289,429. Net of $239k and per year return of: $9600 Now obviously 11 > 9.6 but in one scenario you are spending 3 times the amount of “work” or effort. As you would need 3 houses vs 1. I guess conventional thinking would go, if you are short on money and long on time, lending short is the way to go. Numbers change slightly if we were to calculate a pay off at 7 years (around average mortgage length). 10 year note: 7 years of mortgage collection: $113,400 Payoff amount: $17,995 Total: $131,300 30 year note: 7 years of mortgage collection: $67,533 Payoff amount: $83,472 Total: $151,000 ThoUGHTs Now we can add another variable: what if we were able to throw in the cash flow into an 8% index fund each month. How would the higher monthly cash flow change things with a 10 vs 39 year mortgage 10 YEAR MORTGAGE 16,200 added per year at an 8% compounded return for 7 years= $156,113 30 YEAR MORTGAGE $9647 ADDeD /YEAR 8% RETURN FoR 7 YEARS $92,900 So it appears shorter term loan, with returns reinvested will produce a greater return and a greater ROI with a few assumptions. Secondly it will also decrease risk as your money is returned more quickly to you and equity is built up sooner by the buyer decreasing their likiehood of foreclosure. Maybe someone can throw out some FV numbers to corroborate this.

[Jim Hartmann]

@Logan Turner, It would be interesting to also look at your rate of return if you were to sell your note using a 30 year amortization, but have a 10 year balloon or some other balloon.  This does not lock up your money for the entire 30 years, but allows lower payments for the borrower.  Of course, you could amortize at whatever terms you desire, but this helps a borrower to get back on their feet (if needed) and then re-finance at the 10 year mark (or before).  You want to make it so that the borrowers are able to re-finance. The sooner that they re-finance, the higher your return.

I agree also with @Steven Burke   You do have to re-invest it into another similar or higher yielding investment however.