yield on note not accurate since part of it is principal

[Michael Vaughn]

hey
i am starting my way in the note business, been watching a weclosenotes video and there is something i didn't get (also noticed that in other places for for sake of discussion will refer to that).

in the video i watched he gives an example of buying a note using money from an investor, someone who wants to get 8-12% roi on his money. now, he gives an example of a note he buys for 25,000 and the payments per year are 5,000, which means an roi of 20%, so anything above what the investor wants he keeps for himself (on top of money he keeps in his pocket if the note costs less, but lets leave that for now). 

the problem i have here is the 20% is not an actual roi. the 5000 total payments in a given year includes both principal and intrest (how much is which depends on the rate and years). in the end of that year the note value is less then 25k since part of the principal was already paid during that year, so you can't look at this payments as equal to rent payments since in the rent payments scenraio the house is still yours 100% at the end of a given year.
what am i missing here?

[Mike Hartzog]

@Michael Vaughn To calculate annual yield on a normal loan where there are regular monthly P&I payments, I use a spreadsheet.  Excel has a RATE formula for calculating yield.  You will need to know the number of payments remaining, principal balance, and payment amount.  (When buying loans at a discount you would use your cost basis as the amount, and not the principal balance to find your investment yield.)  I did a blog post which explains this and 3 other related financial formulas, and it includes a link where you can download a sample spreadsheet which provides an example of how to use each of the 4 formulas.

https://www.biggerpockets.com/blogs/5359/41924-doing-the-math-on-mortgage-notes