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H & P Capital Investments LLC
Issue 47
May 2009
Pointers on Points
by Tom Henderson

One of the questions I get asked frequently concerns the different terms hard money lenders offer. Some hard money lenders will offer interest only with several points, others offer lower interest amortized over 30 years with fewer points. Which one is the better offer?

This is a good way to demonstrate how points affect the interest you are paying, and at the same time, show you how to calculate which is the better deal.

Remember, all we are doing is applying the 5 variables of the time value of money, and coming up with an answer. Let's look at typical situation.

You find a house that is worth $100,000 ARV, that you can pick up for $50,000 and it will take $15,000 to fix up. You want to borrow $65,000 from a friendly neighborhood hard money lender, so you shop around, and lo and behold, they are offering you what you think are apples and oranges. Different terms, points and interest rates. With your calculator knowledge, you can plug in the data from all the hard money lenders to determine the best deal. I am not going to delve into the legalities of the HMLs, but merely the number crunching.

For example, one hard money lender is offering to loan you $65,000 at 14% interest only, with monthly payments and 4 points. The loan is due within one year. What interest are you really paying?

N = 12
I/Yr = 14%
PV = $65,000
Pmt = -$758.33
FV = -$65,000

Hang on, there. Remember, there are 4 points, or 4% the HML is charging up front. This means that he/she is not actually funding $65,000 but only $62,400. ($65,000- $2,600). Let's plug these real figures into our calculator and see what happens.

N = 12
I/Yr = 18.41%
PV = $62,400
Pmt = -$758.33
FV = -$65,000

Jumped up a tad from the 14%, didn't it. But wait, there is more. Let's assume you paid this note off in 6 months instead of 12 months. What happens then?

N = 6
I/Yr = 22.53%
PV = $62,500
Pmt = -$758.33
FV = -$65,000

Jumped up even more, didn't it. Why, because the points up created a situation where the sooner the loan is paid off, the higher the yield for the HML. Let's play some more and assume you paid the loan off in 1 month. What would the HML's yield be? Did you get 64.58%

Being able to calculate yields will not only arm you with the knowledge of obtaining the best loans, but also give you insight into the yields you can look forward to should you decide to become a HML on a large or small scale.

THE NOTE PROFESSOR NOTEBOOK outlines in easy to understand language and examples on how to use a financial calculator and also HOW TO OBTAIN OBSCENE YIELDS with SMALL MONEY. Those who know the time value of money collect interest. Those who do not, pay interest.

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

Copyright © H&P Capital Investments LLC
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by Tom Henderson
hp pawn sh

Myth of Economic Stimulus

To continue the thought process of last month's issue, we will now examine another false premise behind the Economic Stimulus Package. The false premise lies in the assumption that unless money is actually spent by the consumer, it remains idle, and therefore government needs to spend money to get "the economy moving" again. This myth is also known as the Paradox of Thrift. For example, if you have $100, rather than spend it now, you save it for "a rainy day" or to spend in the future. The assumption is because you did not spend this money immediately, the local merchants will not sell their goods. To "jump start" the economy, government will start spending. We have already delved into the false logic that since government can only spend what it taxes, borrows, or money that is printed, government spending can only result in inflation or transfer of wealth from productive endeavors to less productive endeavors. In this article I want to point out another fallacy of the Paradox of Thrift. The Paradox of Thrift ignores what happens to money that is saved.

Let's take the example of where you have $100, and rather than spend it now, you choose to save it. Where does this money go? It is important here to note that this $100 is REAL CAPITAL, not just paper entries on a balance sheet. If you put it in the bank or savings account, your bank will use this money to finance everything from appliances to small businesses to mortgages. Is this money not being spent? Of course it is! Perhaps if you are a little more "greedy" and want to take on a little more risk, you pesonally might invest in a company or business opportunity or maybe Notes or real estate.. Again, is this money not being spent? Of course it is!

Upon examination of what happens to money when it is saved, rather than being detrimental to an economy, savings (the accumulation of capital) is not only beneficial to economic growth, it is essential. Without savings economic growth is impossible.

The Paradox of Thrift arose out of old Keynesian economics, which has long ago been debunked. However, politicians and "economists for hire" will still tout this fallacy in their attempt to justify their taking your money and transferring it to whoever is in their favor at the time. (Makes no difference which party is in power)

I am going to refer you to another economic masterpiece which demonstrates more clearly than I have time for in this article the outcome of what happens if everybody spends their money, contrasted to those who are frugal and live within their means, and actually save money. Economics In One Lesson by Henry Hazlitt paraphrases Fredric Bastiat's example of two brothers, one a spender, the other a saver. You can scroll down to page 163, THE ASSAULT ON SAVINGS, but I suggest you read Hazlitt's entire book. It is easy reading and will put economics into understandable logic. You will also notice many other economic fallacies that are being spread in today's media.

I hope I have demonstrated that saving money, far from being a detriment to economic growth, saving money is vital for economic progress. It is the accumulation of capital that permits economic expansion. Politicians spending YOUR MONEY, is a form of consuming without producing. It will eventually lead to economic stagnation.

Next issue, we will discuss the topic that politicians will completely ignore. What happens when money is printed, borrowed, or taxed directly to pay for "the stimulus" package? Knowing the answers to these questions will help direct you in your future real estate investments or Notes. Remember: ACT OUT OF KNOWLEDGE, NOT OUT OF FEAR.

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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