I was going through some of my old articles written several years ago for various national publications, I came across this article which demonstrates how applying the concepts of the time value of money is as true today as it was almost a decade ago. Since October is "tax time" for those who extended their tax filings, as a Note Buyer or broker, you will be presented with excellent opportunities to achieve astronomical yields.

Below is the time tested technique printed in a national publication in 2008 which is still relevant for those of you brokering or buying notes.

For those of you who are new to brokering or investing in notes, the tax season presents a multitude of opportunities, especially in this market. The sub prime meltdown forced many rehabbers to sell their properties using some form of owner financing.

This time of year rehabbers, or other "dealers" in real estate who were forced to sell their properties using owner financing are now taking their transactions to their CPAs. They get a big shot of reality when their CPA tells them the IRS considers the note they took back in profit is the same as cash. In other words, these investors are going to have to pay taxes, IN CASH, on their paper profits. The problem is many have no cash to take care of Uncle Sam. Those who have taken my workshop know that tax time is a perfect opportunity to apply your knowledge.

A case in point was a rehabber in a predicament that came to me needing cash. For brevity and simplicity, I am going to use a note with the following terms:

N = 360
I/YR= 9
PV = -100,000
PMT = 804.62
FV = 0

The rehabber had sold several properties through owner financing. Because he was not an investor, but rather a dealer in real estate, the IRS considered all his paper profits, that were being paid over time, to be the same as receiving all cash. He has a big tax problem. The rehabber needed $28,000 to pay his tax liabilities, but had only notes to show for his efforts. This particular $100,000 note was the best note he had. He really wanted to keep this note long term, because it was a good note, but he still needed cash for the Inferno Revenue Service. "Can you buy 5 years of payments and pay get me my $28,000", asked the investor. Let's see how this looks.

N = 60
I/YR= ?
PV = -28,000
PMT = 804.62
FV = 0

For a little calculator practice, did you come up with 23.95% yield. Would I do this deal for a 24% yield? You bet your sweet HP 10B II I would. . (For a little more calculator practice, at the end of 5 years, what balance would the seller have when the note reverted to him/her?)

When you are getting yields like this, start "spreading the wealth" and increasing your yield at the same time. I called one of my investors and asked her if she wanted to get a 12% yield on a well secured note. "Of course", she replied. What does her position look like?

I love the concept of the time value of money. For my investor to receive a 12% yield for 60 months on $28,000, she needs a cash flow of only $622.84. Subtracting this from the $804.62 payment, and I will receive $181.78 a month for 5 years, or $10,906.53, with 0 money in the deal. This is what I call Making Obscene Yields with Little Money. Zero is "littlest money" I can think of.

As a side note, I actually borrowed the $28,000 from my investor for 5 years @ 12% and made payments to her. I strongly suggest you get legal and tax advice before using any investment technique, especially when dealing in notes.

The moral to this story is the next time you get a call from someone wanting to sell his/her note, do not forget to ask why are they selling? If they say to pay taxes, your mind should be hearing the cash register go "Ching, Ching! Ching, Ching!"

If you have a topic you would like Tom to discuss, Contact me. It is from your comments I get many of my topics.

Remember, if you know of someone who has a note to sell, I do pay referral fees and you receive the benefits.

To forward this email to friends or business associates who have an interest in time value of money, click the "Forward this newsletter" on the front page. Tom Henderson /a.k.a. THE NOTE PROFESSOR .

Copyright � H&P Capital Investments LLC
All rights reserved

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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.

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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.

I have been asked to comment on the economic effects of negative interest rates should the Federal Reserve decide to implement the Negative Interest Rate Program (NIRP). This is a very difficult topic to cover in the small space of a newsletter, so I will abbreviate the issues rather than going into detail.

As an introduction, remember that all national banks will deposit money in the Federal Reserve Bank in order to have a "reserve" account in the event these national banks need cash for any reason. The Federal Reserve will pay these banks interest on the deposited money.

In a nutshell negative interest rates means that rather than collecting interest, these member banks will be forced to pay interest to the Federal Reserve on the banks' deposits for reserves. In theory, charging banks for deposits will promote banks to lend money. On the extreme, member banks would start charging their depositors interest to park their money. In other words, depositors would be charged interest on their deposits. If this sounds illogical, it is because it is illogical.

The reasoning behind NIRP is based on faulty economic theory. The "powers that be" have decided that prices might fall and we will go into a deflationary scenario. For some reason our all-knowing economic planners, have decided that lower prices are bad, and they, and they alone know what prices should be. Under this false economic rationale, if prices start falling, everybody, everywhere will postpone buying anything in anticipation of getting a better price later. What is not being addressed in this scenario is the laws of supply and demand.

We have only to look at our economic pricing system to know that anticipation of falling prices does not mean consumers will stop buying. Under this fallacious logic, nobody would buy anything until it was on sale, knowing the price will fall? Even then people might choose to wait to buy in hopes that prices would decline further. While it is true many do wait for sales to make purchases, it is not the norm or few cars would be sold until year's end, and shopping malls would be empty unless there were industry wide sales.

Under the false assumption that falling prices are bad, the economic planners decide to set price controls on money at a below market rate. The NIRP takes this price control to another level, and will set interest BELOW 0.

As been demonstrated in past issues, price controls cause shortages. What will be the shortage of low interest or even negative interest rates? A shortage of savers. Remember that economic growth depends on savings.

For example, without savings, individuals could not amass capital for the down payment for a house, nor even have funds for retirement. Without savings there would be no bank deposits. Without deposits, banks would not have the funds to lend money to finance everything from automobiles to business expansion. Arbitrary low interest rates discourage savings.

Are we not already witnessing the effects of arbitrary low interest in the form of investors not putting their savings in almost 0 interest accounts and purchasing stocks, and even junk bonds? Likewise, when it is less expensive to borrow than to pay dividends, many corporations are buying back their stock with borrowed money. Hence we see a bubble forming in stocks.

Ironically, the purpose of low interest and NIRP is to encourage banks to lend money. However, since people tend not to save in banks paying low interest, not to mention negative interest, banks will not have the capital to lend. So what happens when people are charged money to make deposits?

Think about it. What would you do if you are going to be charged to keep your money in a bank? Would you not put the least amount of your money in the bank and start paying cash. Now we are back to the spiral of less money in banks, the less the banks can lend. This defeats the entire purpose of NIRP.

There is also the strong possibility of NIRP starting currency wars. Which country would you put your money; the one with a positive interest rate or one where you have to pay to invest your money? Money will tend to flow out of one currency to another, not because of the production of that country, but because of arbitrarily set interest rates. We already witness this today to a certain extent.

More importantly, let's examine how NIRP has worked in Japan and to a large extent the United States. The Japan economy has been stagnant for almost a decade with NIRP. Likewise, the U.S. has had arbitrarily low interest rates for almost a decade with the same stagnant results.

Why? Because price controls cause shortages. Arbitrarily low interest rates is a form of price controls which translates into a shortage of depositors. Moreover, add to this the regulatory programs that hinder banks from lending due to bureaucratic "stress tests", will result in contradictory economic forces. On one hand there is cheap money, while on the other hand there is less money saved and more restrictions to lending money.

Our current economic situation gives us insight into the results of arbitrary low interest rates. Since we now have almost zero interest rates, which discourages savings, and therefore lending capital, is it any wonder we are experiencing a measly 1.2% growth. As a side note part of this 1.2% can be attributed to government spending, which we know is not production, but rather consumption. In essence, we have no growth.

Since savings is discouraged, money is flowing into other areas such as the stock market. Hence, although we have only 1.2% growth, the stock market is at record highs as stocks become the alternative investment vehicle, as well as corporations start buying back their stock instead of paying dividends because of low, low interest rates. These two combinations are setting the stage for a stock market bubble.

It should also be noted that the food chain of a healthy housing market is starter homes. As a general rule, starter homes is the catalyst of a healthy housing market. For example, as a young couple purchases an existing home, the existing home owner will generally use the proceeds to purchase a more expensive home. Likewise, the more expensive home owner will also move up and so on.

The current real estate market demonstrates contradiction of low interest rates vs. lending capital. While money is readily available to those with large down payments and high credit scores purchasing higher priced homes, credit is restricted when it comes to cheaper starter homes and no little down payment. Without the capital necessary to finance starter homes, the food chain is broken.

With the restriction on the financing of starter homes, rentals have become a very viable investment. As of now, it appears investors, not home owners, are filling the vacuum for starter homes.

However, I would be very aware of going deeply in debt to purchase any investment house. Should we go deeper into a credit crunch, an exit strategy will be greatly reduced. Be aware.

In conclusion, NIRP is another form of price control. Price controls cause shortages. It takes arbitrary low interest rates to another level. The effects of NIRP is to discourage savings and inhibit lending at best, and at worst set the stage where governments will start punishing people who keep cash on hand, rather than deposit it. We are already witnessing the bubble in stocks, along with little or no economic growth. Other repercussions, such as a war on cash and investors forced to invest in more risky alternatives are but two. Nothing good can come from NIRP.

If you have questions or a topic you would like me to discuss CONTACT ME Tom Henderson /a.k.a. THE NOTE PROFESSOR. It is from your comments that I receive many of my topics.

Copyright � H&P Capital Investments LLC
All rights reserved

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