Note Professor Newsletter

BUSTING the BALLOON by Making Change - Continued

For example, you wanted to purchase an apartment house. When the dust settled in the deal, you were $50,000 short on the cash side. The seller agreed to carry paper, but wanted all his money within a 5 year period. The real estate agent suggested that the seller take back a note for the $50,000 with 10% interest only payments and a five year balloon. You are "assured" by both the seller and real estate agent that the property will rise in value in 5 years, and that refinancing "should" not be a problem.

Here is what the balloon note would look like:

N	%i	PV	PMT	FV
60	.83	-$50,000	$416.67	$50,000

(If you do not understand how to calculate the above, go to "Determining the Balance of a Note and a Balloon" Click here

You are certain that you can have a $10,000 positive cash flow, even after factoring in the interest only payments. You do want a positive cash flow, but immediate cash is not your motivating factor. Being a prudent investor, you are rightfully concerned about having to come up with $50,000 in 5 years. Because you have read The NOTE PROFESSOR, you decide to make a different offer that will give the seller his money back in 5 years, still give you a positive cash flow, but will alleviate the problem of not being able to refinance, nor being able to come up with $50 grand in 5 years.

Your offer goes like this: Instead of a $50,000 balloon due in 5 years, you are going to pay interest only and $10,000 a year principal for 5 years until the balloon is paid off. While it is true that your positive cash flow might be eaten up by paying off the balloon the first year, your cash flow will increase each year because as the principal is decreased each year, so are the interest payments.

Your note would now look like this: (Payment is calculated by multiplying the 10% times the PV and dividing by 12 monthly payments)

	N	%i	PV	PMT	FV	Baloon
Year 1	60	.83	$50,000	$416.67	$10,000	$10,000
Year 2	48	.83	$40,000	$333.33	$10,000	$10,000
Year 3	36	.83	$30,000	$250.00	$10,000	$10,000
Year 4	24	.83	$20,000	$166.67	$10,000	$10,000
Year 5	12	.83	$10,000	$ 83.33	$10,000	$10,000

If your analysis of the property were correct, in the first year, you would have a neutral cash flow because of the mini balloon payment. In the second year, however, you would have a $1000 positive cash flow because your interest payments were reduced by $1,000. (10% of the $10,000 principle) The second year your income would increase by another $1,000, and will continue to increase by $1,000 until the entire $50,000 is paid off. At that point, there would be no more balloon payments. Your cash flow would be the entire $10,000 because you would have neither interest payments nor a balloon payment. More importantly, you would not have to come up with $50,000 in one lump sum.

Making change, and splitting up the balloon payments takes away the risk of having to come up with a large lump sum in a short amount of time. Take it from the PROFESSOR, anybody who thinks that 60 months is a long time, never has taken out a $50,000 note due in 5 years.

Splitting the balloon payments can also be very effective when buying a business. Does this technique not make more sense than make believing that $50 grand will fall from the sky in 5 years?

Always consult an attorney or CPA with dealing in notes or real estate.

Try this technique out. Contact The PROFESSOR and tell me how it came out. I love success stories.

HERE YE, HERE YE. In conjunction with DFWREIN I will be teaching a one day seminar on Saturday, April 16th, from 8:30 a.m. until 5:00 p. m. in Dallas, TX. The topic is THE ABCs Of NOTES and OWNER FINANCING. This is a NUTS and Bolts course on how the time value of money can make you rich, and how to use notes in everyday real estate deals. As interest rates continue to go up, this knowledge is invaluable. This article is only an example of some of the concepts you will learn.

The one day seminar includes THE NOTE PROFESSOR NOTEBOOK, a Continental breakfast, and Lunch. DFWREIN members, if you want to take advantage of a tremendous discount, pre register to SAVE over $150, contact Mayra@DFWREIN.COM or call her @ 972.671.7346 for details. If you already own THE NOTE PROFESSOR NOTEBOOK, there is a "seminar only" price. There are also pre registration discounts for non members, as well. SEATING WILL BE LIMITED!!! The cost is $250 at the door. So register NOW and SAVE!!!!

P.S. This will be a "hands on" seminar. Please bring a financial calculator. Since there are a large number of calculators on the market, we cannot go over each individual brand and model. Tom will be using a HP 10 BII because of its simplicity and price. These can be purchased for under $30 at any office supply or discount stores.