Selling or keeping your mortgage note is a personal matter, and the answer always depends on needs, timing, and preferences.
Let’s delve into a real-life example for perspective and understanding.
Selling a Note
A client of American Equity Funding was interested in selling a mortgage note with a modest face rate of four percent. The balance was $100,0000 at 4% for 240 months (20 years), with a monthly payment of $605.98. The total of all payments equaled $145,675.20.
To meet the yield and investment-to-value ratios, American Equity Funding bought the mortgage note for a lump net sum of $61,000.00. As normal, we paid all closing costs.
The client then wanted to reinvest his money from the mortgage note sale in another property and needed the $61,000.00 to buy the real estate and pay closing costs.
The market value for the new investment was $150,000.00 but under contract for $120,000.00. Our client made a $60,0000.00 down payment and financed the balance at 8% interest for ten years (120 months) with a monthly payment of $740.00. He rented the property for a gross rent of $1,500.00 per month. Estimated expenses with taxes, insurance, management, and maintenance amounted to about $400.00 a month, leaving a monthly net operating income (NOI) of $360.00 or $4,320.00 annually.
Gains
The following 120 months (10 more years) would net $1,100.00 per month or $13, 200.00 per year equaling a total net operating income of $175,200.00 in twenty years, assuming rents did not increase.
If the property increases in value by 3% per year for 240 months (twenty years), the financial worth will be $273, 113.00. At the end of twenty years, this investor could theoretically sell the property for, let’s say, $270,000.
The total cash investment was $61,000.00 with net rents of $175,200 for a total net gain of $209,000.00 in twenty years.
The gain on the $61,000.00 investment plus the net rent collected would total $175,200.00 for an increase of 381,000.00 over twenty years as opposed to the $145,675.20 total payments on the $100,000.00 note at 4% for twenty years at $605.98 per month.
Summary
American Equity Funding makes it a point to never tell clients that they should sell their mortgage note. Although the above example makes sense from a business and mathematical perspective, it would not be suitable for everyone. Peoples’ lives, situations, and investment opportunities constantly change, and often it is a matter of timing, desires, and capabilities.
For this reason, passive investors sometimes buy mortgage notes at a discount, which can yield a higher return than the face rate of 4%.
Passive Investment
In the above situation, our client invested $61,000.00 in a mortgage note with an unpaid principal balance (UPB) of $100,000.00. The payment is $605.98 for 240 months (20 years). If we apply the discount to this mortgage note, then the return (yield) becomes 10.43% over the life of the loan. The yield goes up exponentially if the note pays off early.
For instance, if our client sells or refinances the property after five years and the note pays off at the end of that time, then the balance is still $81,923.80. He will have received $36,358.80 in monthly payments, and the effective yield on this early payoff would be 16.54%.
Conclusion
So, should you sell your mortgage note at a discount or keep it? This is an individual question, and each case is different. Simple or complicated, the decision rests solely on the mortgage note holder.
The example of one of our clients gives insight into the options and responsibilities of selling or keeping a mortgage note.
With over eight billion people worldwide, there are endless diverse needs and opinions. American Equity Funding has bought owner-financed mortgage notes with a variety of reasons for our clients including medical bills, dream vacations, paying off debt, and further investments.
Please feel free to contact Steve or Ryan at American Equity Funding at any time, and we will do our utmost to advise and help you in the best way possible, regardless of the situation.
Steve Whitlock
Owner, American Equity Funding
Cell: 479-650-1499
Office Phone: 1-800-874-2389
E-mail: steve@americanequityfunding.com
Ryan
America Equity Funding
Office Phone: 1-800-874-2389
E-mail: ryan@americanequityfunding.com