I received a question from one of my subscribers wanting to know what are the advantages of wrapping a note rather than taking back a second lien. The two main advantages are a wrap note gives you more control, and therefore security. This aspect is a topic for a different issue. The other advantage is how a wrap note can increase your yields dramatically. The "number crunching" of wraps will be my topic in this issue. The best example I can give is to reprint an section from The Note Professor Notebook.

From Page 91 of THE NOTE PROFESSOR NOTEBOOK

I call a wrap around mortgage, or wrap, for short, a gift, because you will be earning interest on money you do not lend. Great gift, don't you think? A wrap around mortgage is also called an All Inclusive Trust Deed, and a "Tootsie Pop" mortgage.

A wrap is nothing more than a junior lien that "wraps" around senior liens. In essence, a wrap works like this. The buyers would make you a monthly payment for the wrap note. You then would make the underlying payments, and have a cash flow of what is left. Because your wrap lien includes the underlying senior liens, you will be collecting interest on the spread between your junior lien and the senior liens. Hence, the "all inclusive" term. By collecting interest on money you do not lend, you will greatly increase your yield, as we will later plainly see. For example, if you had a property worth $100,000 with a mortgage of $70,000 you would have equity of $30,000.

We will assume the underlying lien is assumable, and that the terms are at 7% with payments of $629.18 for 15 years. Bob and Betty Buyer have offered you $100,000 with 10% down, and want you to finance the rest. You have two options to make this deal work. One is for you to take back a straight second with the Buyers assuming the 1st. The other is to take back a wrap around mortgage, where the Buyers would be paying you monthly payments, and you would be paying the underlying lien. Which would offer you the better yield? Lets' look.

If you structure the deal where the Buyers put their 10% down and assume the 1st lien of $70,000, you would then carry a 2nd of $20,000 dollars @10% interest with payments of $214.92 for 15 years. With this method, you would be receiving a 10% yield. Here is what the note would look like:

N = 180
I/YR= 10
PV = -20,000
PMT = 214.92
FV = 0

Let's look at what happens if you were to structure this deal using a wrap around mortgage. You would be carrying a $90,000 note that would include the senior lien of $70,000, plus the $20,000 you are financing. Your wrap note would look like this:

N = 180
I/YR= 10
PV = -90,000
PMT = 967.14
FV = 0

With the $967.14 payment, you would make the underlying payment of $629.18. Subtracting the $629.18 from the $967.14, you will enjoy cash flow of $337.96. By structuring the transaction as a wrap, you have increased your cash flow from $214.92 to $337.96. That is $123.04 more a month!

But Tom, how is this possible? Both the 2nd lien note and the wrap were at 10%. The answer is simple. In the first example, you are receiving 10% on only the $20,000 you financed. By using a wrap mortgage, you are not only receiving 10% on the $20,000 that you are financing, but also the spread of 3% (10%-7%) on $70,000 on money you did not lend. Let me say that again, and in another way, in case you did not pick up on it. YOU ARE RECEIVING 3% ON $70,000 THAT WAS NOT YOUR MONEY!

Let's see what your yield will be: Remember you have $20,000 loaned out, and receiving a cash flow of $337.96 monthly for 180 months. After we identify the variables, we will solve for I/Yr. Your deal looks like this:

N = 180
I/YR= 19.09
PV = -20,000
PMT = 337.96
FV = 0

Wow! You are enjoying a whopping 19.09% yield while Bob and Betty Buyer are paying only 10%. Do you understand why I call wraps a gift? There is a gift of an extra 9.09%.

There are several ways to structure wraps. This example is the least complicated, where you had N on underlying liens coinciding with the N on the wrap. You could also have the wrap longer than the underlying, where the underlying lien is paid off at some point, and you keep the entire wrap payment. That can be real fun. You could introduce balloons, graduated payments, or an endless amount of combinations. These combinations can give you even extra gifts.

Yes, there are disadvantages to wraps, which is a topic for another discussion. In this lesson, I wanted to bring out how a wrap basically works, and how you can use a wrap to increase you yield.

As always, obtain competent legal and tax advice when venturing into the world of owner financing, especially wrap around mortgages. Be especially aware of Dodd Frank and SAFE ACT regulations.

Try the wrap technique then CONTACT ME and tell me how you came out.

CONTACT ME And remember, if you know of someone who has a note to sell, I DO PAY REFERRALS.

Copyright © H&P Capital Investments LLC
All rights reserved
Tom Henderson
a.k.a. THE NOTE PROFESSOR

If you have not attended a Note Professor "How To Get Rich with Notes" class, be sure and purchase the Note Professor Note Book manual to enhance your knowledge of creative real estate financing and note buying and selling.

"I got your news letter. It was great, purchased your (Notebook) and it was awesome. I used your renter technique and it worked also. I am getting 41% return thanks to your expert advice. I have spent hundreds and not able to do any thing thru other gurus" Gary W. Garland, TX

"It blew me away what a powerful tool notes can be. Lots of great information, worth every penny! Highly recommended."
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You will learn at least one new usable concept to increase your profit in buying or selling notes and real estate.
Tom Henderson, author

By popular demand, THE NOTE PROFESSOR NOTEBOOK is now available in easy, downloadable E- book form for a the low, affordable price of $39.95.

Other products are also available, including HOW TO MAKE OBSCENE PROFITS with SMALL MONEY, and GUIDE FOR SECOND LIENS. There is also a FREE download of CHECK LIST FOR OWNER FINANCING.

Simply go to the NOTE BUYERS STORE. I can think of nowhere that you can find such information packed products at such incredibly low prices. We are still working out the bugs, so if you have any problems, be sure to contact me.

In last month's issue we reviewed one of the most important aspects of applying economic principles, which is the Latin term ceterus paribus or "all things remaining the same". We discussed how government intervention distorts market signals which makes it impossible for "all things to remain the same". In this issue we will discuss two examples of the effects of government intervention on the real estate market.

An investor friend sent me a news article pointing out that BBVA Compass Bank is introducing a new program where buyers can get into homes with as little a 3% down. She wisely pointed out that she would not even consider selling her property using seller financing with less than 10% down. It appears banks will revamp the old policy of easy money.

It seems that lessons were not learned in the last bubble. We know the price of real estate is directly proportional to the financing available. Because of easy financing the demand for purchasing homes will increase, which raises the price of real estate.

What happens when financing is eventually curtailed or the price of real estate reaches unnatural high prices? The bubble will burst and once again the price of real estate will decline and seek its market level. If other banks follow suit, or if home financing becomes even easier, there is no question this bubble will be harder than the first. Why do the powers that be not think this is going to happen again?

Add to this an article I read where the government programs to refinance underwater loans is not having the success that was promised. One third of these loan modifications are turning into defaults. It seems that one third of these "reperforming" loans are turning in to "redefaulting" loans. In other words even with the new government program, home owners are not able to make their payments and are going into default.

The above government programs result in conflicting economic principles. On one end the easy money will tend to make prices go higher. At the same time the emergence of defaults will tend to make real estate prices decline. You tell me what the outcome will be.

"All things remaining the same", here is my advice taking into consideration the current set of circumstances. First, if you plan on selling your property, or buying a home, now would be a good time since there is money available at cheap prices, and at the same time real estate prices have not risen to the point of being unrealistic. Similarly, this is a perfect time to refinance your properties since interest rates are low and money is somewhat easier to obtain.

We discussed these scenarios in my apartments class a couple of weeks ago. One of the risks of purchasing apartments or rental properties is for easy money policies to be revamped. Easy loans result in good paying tenants purchasing homes instead of renting. Those who owned rental properties in the mid 2000s know very well that vacancies were above average when money was easy, except for C properties.

Apartments and rental properties are categorized as being A, B, C, and D properties. In a nutshell, A properties are your newer, high end rentals, while B properties are more suited for middle class or blue collar workers. C properties are geared to your lower income tenants. For my money, C properties are the safest investments from and economic point of view. The D properties are your war zones. Only the bravest of the brave should be investing in these areas.

Because C property tenants tend to never purchase homes, but continue to rent, I have strongly suggested purchasing good C properties for cash flow. To illustrate this strategy, I received a call from an investor friend who indicated he has been doing quite well purchasing C rentals over the years. Why? Because he is purchasing these properties at discount rates, either from the open market or from banks. He indicated he has never had an unruly vacancy problem, and therefore he is enjoying a very lucrative cash flow. Moral to the story is C tenants do not purchase homes and can make good tenants.

Contrast this to the investor friend that sent me the BBVA article. She fears this easy money program will take away her good paying tenants causing a vacancy problem. Wisely, she is aware of the situation and is prepared to act accordingly.

With this being said, I stand by the advice I have been giving for months. Purchase properties for all cash at rock bottom prices; or purchase with seller financing with favorable terms. Both will give you an excellent exit strategy, as well as increasing your wealth. Along the same lines, if you have notes to sell, now will be a good time because when interest rates rise or when the bubble burst, note prices decline.

Summary: Always have a good exit strategy that does not include banks. Pay attention to the money markets and the Federal Reserve. Above all, act out of knowledge, not fear or ignorance.



If you have questions or comments, CONTACT ME Tom Henderson /a.k.a. THE NOTE PROFESSOR Remember: If you know of someone who has a note to sell, I DO PAY REFERRAL FEES.

Copyright © H&P Capital Investments LLC
All rights reserved

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