How do you tell if a note is a good investment?

[Account Closed]

I am brokering notes similar to this one. This one is available. The seller will not discount. I'd like feedback please. How do you figure out if it's a good investment ? Performing Note 
Kansas City MO 
Price $25,200 
Selling 138 payments 
Buyback Option After 60 Months 
Value $140,000 
Current balance $35,687 
Original balance $37,000 
P & I $324.70 
Original term 360 
Remaining term 297 
Investment to value 26% 
Loan to value 36% 
Interest rate 10% 
Effective yield 10.35% 
Seasoning-Stellar - 53 Months 
Dodd Frank N/A 08/14/2012 
Projected rent $947

[James C.]

Daryl,

The way to go about this is to calculate both an NPV and an IRR. The NPV is the Net Present Value of an income stream, discounted to the cost of capital (or required rate of return) and the IRR sets the NPV function = 0 to get a rate of return. If NPV is +, then the investment will return more than your required rate of return, if - then it doesn't. If IRR is greater than required rate of return, then indications are buy, otherwise, if IRR is less than required rate of return, then pass.

Given that most hard money lenders are at least 10% if not more like 12-15% that should be your target for a return. After all, you could place your money with them, and make that return, or close to it. So, my required rate of return is 12%. Lets see how we do.

Period	Payment
0	-$25,200.00
1	$3,896.40
2	$3,896.40
3	$3,896.40
4	$3,896.40
5	$3,896.40
6	$3,896.40
7	$3,896.40
8	$3,896.40
9	$3,896.40
10	$3,896.40
11	$3,896.40
12	$1,948.20
IRR	10.6040%
NPV @ 12%	-$1,396.69

RutRo! My IRR is at 10.60% and I need 12% so, no go, and my NPV is negative, meaning that it's a looser. Note that I annualized this to make it fit, as well as make my life easier. It wouldn't change if I used the $324.70 and went for 138 payments. The -$25,200 is the payment for the note, and the $3896.40 is 12*$324.70. Easy to do on a spreadsheet. I would suspect the note buyers would have a required rate of return for this approaching 18% or so. If I'm wrong, I hope they correct me.

So there you have it. I would pass, mostly because my required rate of return is not met, and furthermore, it's going to cost me money to do my due diligence on the loan, and that means more than $25,200 out the door. For the same effort, I could have a $250,000 note, with better characteristics.

I'm sure that Jay Hinrichs, Don Konipol,  or Bob Malecki or any of the other note guys here could poke some holes in this, but it should be in the ballpark of correct.

Hope it helps.

Good Luck!

Jim