Quote from @Chris Seveney:
OK. So let me understand this:
1. You take $10k out of a LOC and invest it and get 19% interest ($300/mo for 4 years). Not sure where you are getting 19% interest. 10% interest is $253/mo which I would think be more in line. I will use that number as a reference:
2. Your LOC at 4% over 10 year am. period is $101/mo payment.
3. You pay $2,000 a month back + payment so in your case $2300
4. So after 5 months you:
a. taken a LOC of $10k but repaid it with $8k of cash and $2k of the invested money.
SO AT THAT STAGE:
You are $8,000 out of pocket - Correct?
You are getting lets say the $253/month for 36 months though....
Welp - thats only $8,855 which gets you an $855 return over the 3 years.
If you put $8,000 in a T-bill at 4% during that time you would have $8,960...
What am I missing? Getting P&I payments (and paying ordinary income on it), will NEVER yield a better return than interest only.
Sidenote: I am a note investor and play in this space as my full time job, so I am not some crackhead.
Thank you Chris for taking the time to elaborate on your observations. I think your thought process makes a lot of sense, especially when it comes to how much more you could yield with interest only vs short-term P&I payments. If I may, I'd like to build a bit more on @Clint Vanderlinden's point on layering
Using the same assumptions:
- $10k LOC at 10% over 4 years (~$253 / month)
- $2k / month contribution
Scenario 1: Only one short-term investment
You break this down very well, and I'll only add that we are using 4 years and not 3 years. It would take $10k / ($2k + $253) = 4.44 months to pay off the LOC. If we wanted to round up to 5 months you would really need $10k - $253*5 = $8,735 out of pocket.
If we stopped right there and decided to cash out until maturity we'd be looking at 43 additional payments of $253 / month since we already used 5. That would mean a return of $253*43 - $8735 = $2144, which translates to a yield of 12.49% over that period (plugged those numbers into 10bii) or a CoC of $2,144 / $253*43 = 20% +/- a few basis points to account for cost of capital.
By using this system we got about a 2%-3% improvement from the original 10%. What happens if we decide to reinvest?
Scenario 2: Two short-term investments:
Let's start another short-term investment with the same terms, except this time we get $2k + $253 + $253 = $2,506 / month to go to town. That means we can pay off the LOC in $10k / $2506 = 4 months. Out-of-pocket is $10k - 4*$506 = $7,976.
If we stop here and collect to maturity we have 43 - 4 = 39 payments left on the 1st investment and 48 - 4 = 44 payments left on this new investment. That translates to a return of $253*(39 + 44) - ($8,735 + $7,976) = $4,288. On JUST the 2nd investment, 10bii computes a 19% yield when N=44, PV=7976, and PMT=253. Overall CoC would be 4288 / ($8,735 + $7,976) = 26% +/- a few basis points account for cost of capital.
By adding just one more investment we see a 6% increase in total CoC with only a 4 month additional lead time to full collection (negligible impact from time-value of money) and a ~6.5% increase in yield for the subsequent investment.
Final Thoughts
Following the math suggests that doing more short-term investments makes the performance metrics exponentially better over time, and on their own their own they are still akin to modest although not Earth shattering returns.
I add these details from the context of being a Tardus client for the past year. I welcome and encourage anyone on the forum to chime in if I may have misrepresented anything, but this has been my mental model after spending countless hours running through different scenarios.
