Both the twenty-dollar bill and the hundred-dollar bill are pieces of paper with different numbers written on them: just like your note. The numbers are not as important as WHEN and IF the money is paid. If you wait for the hundred dollars, something could happen to me and I would not be able to pay, or I might refuse to pay. You chose the sure thing rather than take those risks, and that is exactly the situation with your note. I am offering you the sure thing, $8,000 cash, and if you something happen- ing to Mr. Jones and him not being able or willing to make the payments." Mr. Smith decides that he could use $8,000 cash now instead of wondering if he will get a payment every month. You pay him $8,000, he signs the note over to you, and writes a letter to Mr. Jones telling him to send his monthly payments to you from now on. (I've skipped some due diligence steps to keep this example simple.) The transaction does not affect Mr. Jones in the least, other than where he sends his payments. His inter- est rate stays the same as does his monthly payment. You paid $8,000 to receive $132.15 a month for the next 120 months. What is the interest you are receiv- ing on your $8,000 investment? You plug the numbers into your financial calculator and discover that you are getting an annualized interest of 15.63 percent! But we're just beginning. You contact a note investment firm and ask, "How many monthly pay- ments of $132.15 would you expect to buy for $8,000?" If the firm cur- accept my offer, you will not have to worry about
rently invests to get an interest rate (or yield) of 9.6%, the answer is that to get a 9.6% return on $8,000 they need to receive 83 monthly payments of $132.15. You assign them the next 83 pay- ments. The firm pays you $8,000. Mr. Jones mails his payment to them each month. Your out-of-pocket costs for this transaction? Zero. At the end of the 83rd month, the firm has received all the payments they bought from you. They are out of the picture. But remember, you bought 120 payments. Mr. Jones has agreed to make 120 payments. Who gets the remaining 37 payments? YOU DO. And you have nothing invested in this deal. What's the interest rate, or yield, on your investment? Don't try to put that in your calcu- lator. You'll terrify the poor thing. In the note business, we call the above transaction “keeping the back end or the tail end.” Imagine doing
this over and over. In a few years, the back ends will start reverting to you, and your retirement income will just keep growing. Except, you'll have to pay income tax on the back- end payments. Avoid that by having your self-directed Roth IRA do these transactions. Your Roth will keep growing with back-end payments that cost nothing, and the distribu- tions will be tax-free.* That's why I call this the Ideal Retirement Plan. *Always check with your tax advi- sor first. Be sure your self-directed Roth IRA is not borrowing money to purchase the note and is not dealing with a related person or entity. •
W.J. Mencarow is president of The Paper Source, Inc., an educational organization for note investors and brokers since 1987. He offers a free, eight-part e-course on
notes at PaperSourceOnline.com.
66 | think realty magazine :: may / june 2019
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