Am I understanding this deal correctly?

[Patrick Britton]

I am looking at buying a performing note in Fresno, CA.  Outstanding balance is 26k and purchase price would also be $26k.  House value is 175k.  Payment amount is about $450/month.  

If I purchase this note for $26,000, I will receive $450/month, right?  This means the return is over 20% since $450/month is $5,400 a year.  Yes, I know this note has only a few years left (2025), but 20% with so much equity seems pretty decent.  Am I missing something?  

[Ryan Blake]

@Patrick Britton

I think you may be looking at the rate of return wrong. Since this is not an asset as much as a receivable I wouldn't look at it as an annual rate of return. It devalues every year because the time remaining is diminished. At the end of the day (assuming 7 years of time) you are paying $26,000 for the receivable that will pay $37,800 over that time. This is not including the expense of hiring a servicing company to collect money, pay tax and insurance if included, and file your 1099 or other required tax documentation and other local filing that may be needed. I think a servicing company is about $40/month. This leaves you with $410/month and over 7 years will actually give you $34,440. This is the equivalent of investing in a CD at 4.10% interest over 7 years. I think you can do better than a 4.1% return somewhere else. This is why it isn't a great deal.