Newsletter Hip
H & P Capital Investments LLC
Issue 48
June 2009
Trading Notes for Fun and Profit or How to Turn a 10% Note into a 44% Yield
by Tom Henderson

Once you learn the concepts of the time value of money, and how to use a financial calculator, deals will fall into your lap. Not because anybody is in dire need of cash or the note is going bad, but because you are armed with knowledge and can recognize how to improve your note portfolio.

One axiom I teach is "the more the merrier" and "the sooner the better." Trading notes is just one tool where you can apply this axiom to increase your yield. Let's look at a simple example of trading notes that illustrates this concept.

Let's say you were presented a $10,000 note, and the seller needed $5,000. Here is what the note looks like. ( I always put a minus sign in PV because I am in a "buying" mode. It also makes me feel warm and fuzzy to see the PMT as a positive)

N = 120
I/YR = 10
PV = -$10,000
PMT = 132.15
FV = 0

You purchase this note for $5,000. What is your yield?

N = 120
I/YR = ?
PV = -$5,000
PMT = 132.15
FV = 0

You know 4 of the 5 variables. Now solve for the yield.
Did you get 30.09%?

Not bad, Not bad at all. Can it get better? When you know how to tweak the variables of the time value of money, of course it can get better. In your real estate exchange meeting or local real estate club, you discover one of your associates has a note that is going to last only 5 more years, and has an interest rate of 9%. Your associate likes the above average yield his/her note brings, and wishes this note would last longer.

Immediately your wheels start turning, and the lights and sirens start going off. "Tell me about your note," you ask. "Ching, Ching," goes the mental cash register in your head. Here is what your associate's note looked like

N = 60
I/YR = 9
PV = -$10,000
PMT = 207.58
FV = 0

Would You Trade a 10% Note for a 9% Note?
Sounds like a sucker trade, does it not? We shall see.

If you traded your note for your associate's note, how would you stand? Remember, you purchased your $10,000 note for only $5,000.

N = 60
I/YR = ?
PV = -$5,000
PMT = $207.58
FV = 0

What did you get as a yield?
Did you come up with 44.11%

By trading your higher yield note for a lesser yield note, you increased your position from 30% to over 44%. How can this be? Remember the axiom, "The more the merrier. The sooner the better". Are you not getting the best of both worlds? You are not only getting more money, but you are receiving it quicker. The same concept is used in THE NOTE PROFESSOR NOTEBOOK example of turning a 7% note into a 75% yield. When you know concepts, deals that others will pass by, you will profit.

What makes this deal so grand is that your associate now has a note that is paying 10% instead of 9% and will last longer. This is just what he wanted. What a happy camper!!!! Because you were armed with knowledge of how to apply the concepts of the time value of money, you increased your yield to over 44% yield, and your associate ends up with a 10% yield instead of a 9%. This is a WIN/WIN situation for both of you; not to mention that you are gaining a lot of credibility with your peers.

Assuming the collateral of both properties are good, are there any draw backs to this trade? What would happen if there were early payoffs? I will leave you with this exercise to "play" with. Have fun!!! Remember, act out of knowledge, not out of fear or ignorance.

If you have questions on notes or yields Contact Me
I will be happy to discuss your specifics.

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by Tom Henderson
hp pawn sh

Economics of Health Care

I have received several emails asking me my thoughts on the health care situation. Health care is no different than any other goods or services, and are governed by economic laws of supply and demand. Unlike what we are being told, the chaotic status of the health care industry is not a break down of free markets, but rather the end result when an industry abandons free market concepts and embraces doctrines of ranging from government control of supply and prices, to wealth redistribution of groups receiving health care at the expense of others. No industry in the United States is more regulated or more controlled than the medical industry. However, for politicians, the answer to solving the health care conflict is for more regulation and more control, hoping they will get different results.

The fantasy being perpetrated is that government is "protecting" us with all its regulations and control. In reality, it is the AMA (a cartel) and drug companies that are being protected. For example, if you want a simple blood test to check on your sugar level or anything else, you are not allowed to go to a lab to have the procedure done. You must first go to a doctor to have the test ordered, then often return to the doctor to obtain the results. Does this not add to the cost of medicine by having to see a doctor twice? Who is being protected?

Think of it in these terms. What if the National Board of Realtors got enough clout to pass a law where no one could sell their property without paying a Realtor, for your protection, of course. This is exactly what the AMA and drug companies have done.

What is not widely known is how the medical industry evolved from a once free market industry, to the tightly controlled industry we have today. At one time medical treatment was inexpensive and abundant. Then in the early 1900s the AMA decided there were too many doctors and used the force of government to limit supply of medical schools, as well as licensing of doctors. The AMA originally consisted primarily of allopaths, which was the same branch of medicine that used bleeding and leaches to treat illness. With these restrictions it did not take long for the price of health care to rise. Add to this the fact that medical procedures taught in medical schools consists of primarily treating illness with drugs, surgery, and more drugs. Nice deal for the drug companies. The drug industry became the primary "acceptable" way of treating all illness.

To distort the medical industry further, the politicians decided to e nact wealth redistribution programs like Medicare and Medicaid. This not only distorted the price system for health care, but also gave "free" health care to one group at the expense of another group. Like all wealth redistribution programs both Medicare and Medicaid are going broke.

If we want to lower the cost of medical care, we must return to the concepts of free markets, not try to "reform" a system of government control and interference. For almost a century we have seen the medical industry deteriorate, not because of free markets, but because of politicians' distorting the market and the price system. I wish it were true that all we have to do to have inexpensive, quality health care is to turn the medical industry over to politicians. who will decide the price and supply of health care. This is a fantasy in theory and in fact.

What happens when the price of a commodity is artificially lowered. THE DEMAND GOES UP. At the same time, what happens to the supply of a commodity when the price is artificially lowered? THE SUPPLY GOES DOWN. The end result is a SHORTAGE. This is true whether we are talking rent control or this health care industry. This economic reality is ignored by politicians. Sadly, Reality does not ignore economic laws. We have only to look at Cuba and North Korea for the end result.

Here is an excellent link which outlines the history of health care. It is easy reading, and I hope it will enlighten you as to how we deteriorated from inexpensive, abundant health care, to the chaos we are experiencing now. When economies or industries are in constant turmoil, the cause is always the same: POLITICIANS INTERFERING IN THE FREE MARKET PROCESS!! .

If you have questions or comments (HINT: if you have good Notes you might want to convert them to CASH NOW for future profitable investments), please contact me.

Copyright © H&P Capital Investments LLC
All rights reserved


Tom Henderson
H&P Capital Investments LLC

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