Pointers on Points
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
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
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
NOTE PROFESSOR NOTEBOOK
easy to understand language and examples
on how to use a financial calculator and also
TO OBTAIN OBSCENE YIELDS with SMALL
know the time value of money collect
interest. Those who do not, pay interest.
If you have questions on notes or
will be happy to discuss your specifics.
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Tom's ECONOMIC OBSERVATION
Myth of Economic Stimulus
To continue the thought process of last
month's issue, we will now examine another
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
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
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
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
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.
OUT OF KNOWLEDGE, NOT OUT OF
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
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