By JW Warr 1 WWW@AmericanNoteWarehouse.com JW@JWarr.com 512-308-3869
Have you ever found out something you already knew? For instance; what color is a YIELD sign? Most people will answer yellow. Well, I don’t know how many yield signs you’ve seen in your life but yellow is the wrong answer. Yield signs are red and white. Along those lines, how do you think banks make money? Most people think banks make their money off of interest rates, the higher the rate the more they make. The interest rate has very little to do with how they make their money. Banks make most of their money off of something called “amortization.” Amortization is the process of liquidating a debt by periodic payments to the creditor. That is how mortgages are paid off. Before we go much deeper we need to agree on how the interest is calculated so you can see how profitable banks are. If you borrow $100 and pay back $110, what is the interest rate? You simply divide principal into the interest. $100 divided into $10 = .10 or 10%. For every 1 dollar you spend on paying back the principal you spend 10 cents on interest…right? So the bank’s profit is 10% .You do not need a calculator to do this. In the example below if the house sold for $60,000 with $10,000 down and a loan of $50,000 at 6% for 30 years, the payment is $300. Of that amount, $250 is applied to interest. Since the bank gets to keep this money, it is profit and $50 is applied to reduce the principal (cost). If you divide the principal into the interest you will see that the bank’s profit is 502%. If the loan goes for 30 years the bank makes 116%. In other words, for every $1.00 in principal paid, another $1.16 is paid in interest. I believe you should tell the truth then prove it. Don’t let the math or charts scare you. This is simple stuff. Here is how a mortgage is broken down into easy to 2 WWW@AmericanNoteWarehouse.com JW@JWarr.com 512-308-3869
understand simple math. Line 1 is the first month’s payment of which $250 went to interest and $50 went to principal. Remember, we agreed on how to calculate interest (divide principal into the interest) $50 divided into $250 = 500%. That is a mighty fine return on investment. Look at each line and you will see that the longer the borrower keeps t he note the worse the bank’s return gets, but don’t worry, even if the note goes for the whole 30 years the bank still makes 116% (line5) Profit From Loan Mortgage Amount $ 50,000 6.00% Interest Rate $300 Payment Ending Profit Cost Balance Profit Per $1 Profit % 1 $250 $50 $49,950 $5.00 500% First Month 2 $2,983 $614 $49,386 $4.86 486% 1st Year 3 $14,514 $3,473 $46,527 $4.18 418% 5th Year 4 $39,484 $14,476 $35,524 $2.73 273% 15th Year 5 30 Years $57,919 $50,000 116% Zero $1.16 All that baloney about time and amortization is there to bamboozle you. Your wallet can do the math or a fancy c alculator can do it…which one will tell you the truth? You have got to admit this is a great way to make money grow, if you’re the bank . The beauty of this for the banks is they get paid a fixed interest rate guaranteed by a hard asset (House) at a good 3 WWW@AmericanNoteWarehouse.com JW@JWarr.com 512-308-3869
LTV (Loan to Value). They do not have to do any maintenance, pay property tax or buy insurance. This is such a great, safe investment for the banks; they don’t even invest in the stock market. Wouldn’t You Like To Make Money Like a Bank? This will surprise you but it is very easy to make money just like these banks. In fact you can make quite a bit more money than the banks by buying real estate notes. A mortgage and a real estate note are the same thing. If a house is financed through a bank, the loan is called a mortgage. If the previous owner of a house sells the house and finances it himself, the loan is called a real estate note. There are no differences. Someone who owner finances a house understands how much money they can make being the bank. At some time in their life they need some money and offer the real estate note for sale at a discount . Let’s look at an example: the note owner above decides to sell the note after 15 years. The balance is on line 4. The balance is $35,524 and he sells it for $23,693, an $11,831 discount. The new note owner would then collect $300 per month for the next 180 months. Because the note buyer bought a $35,524 note for $23,693 the interest rate that is collected is 13%, guaranteed by the 1 st lien on the house. The home owner continues to pay $300 per month so his rate didn’t change. Because you bought the note at a discount, you are making a better return on your money than the original lender. Remember he was at 6%. You make more on a note than the banks do because of the discount. When you are buying real estate as an investment the 3 most important things you learn is location, location and of course you know the last one, location. A great house in a bad location can result in poor performance; however, a not so great house in a great location can make you all the money. This is because the location of a property is the most important thing when you are trying to flip a property. If the location is desirable you are able to make a lot more money and that is probably why you bought the property in the first place. 4 WWW@AmericanNoteWarehouse.com JW@JWarr.com 512-308-3869
When buying mortgage notes the most important thing is performance, performance and of course, performance, which is made up of the 4 performance parts: 1.) A LTV (Loan To Value) of 70% or lower. 2.) An interest rate of at least 13%. 3.) A ratio of around $12 to $14 for what each $1,000 invested pays back per month (Per 1K per Month). 4.) A discount of at least 15%. All mortgage note buying decisions should be make with these 4 performance parts considered. LTV A lot of people ask me for mortgage notes that are located close to where they live. If you were buying a house, being close to your location would make a lot of sense. That way you could fix it up if you need to. However, when you are buying mortgage notes you are not buying a house, you are buying performance. You want every dollar you invest to make as much as it can. In other words you want each dollar working hard. The odds are you will never even see the collateral that secures your note. Since the house does not belong to you the owner is responsible for all repairs, taxes and maintenance. If a bank 2 blocks from your house was paying 1% interest and a bank 20 miles away was paying 13% where would you put your money? How Banks Think Since buying a mortgage note is a financial transaction not a real estate purchase you will need to think the same way the biggest money earners in the world do. Who makes the most money ? That would be banks. I suggest you study what the biggest money earners do and do that. The biggest money earners in the world conduct their business following a very simple model. They do not invest like all the rest of us; they do not buy gold, stocks, mutual funds or real estate. How is it possible to make more money than anyone and not invest in what everyone else is 5 WWW@AmericanNoteWarehouse.com JW@JWarr.com 512-308-3869
investing in? I’m going to tell you but please keep this well -guarded secret to yourself. Banks lend money out, get collateral at a good LTV and get paid fixed interest that is guaranteed for a fixed term. Banks do not make investments. If you were to take the greatest business idea in the world to a bank and ask them for money, they would ask you for collateral. Do you know why? Because banks do not invest in anything: banks lend money out at a good LTV; they charge a fixed interest that is guaranteed for a fixed term. Banks do not like to gamble. That’s why they make more money than anyone. If they don’t get their payments they simply sell the collateral that they got a good LTV on and make their money that way. Banks are perfectly happy with a loan to value of 80% because that means the owner of the house has invested 20% of the value; the smaller the LTV the safer the loan. The way the banks figure it even if they have to take the collateral back they own it for 80% of its value plus the payments they have received. The average LTV of the notes from American Note Warehouse is 40%. Imagine how much money a bank would make if the average LTV for its loans was 40%. 13% Interest Can you visualize getting paid a guaranteed 13% at a time when banks are only paying 1.5%? Our average note pays 13% and it does not matter what the price of gold is or the Dow Jones Industrial average is. Many people have asked me “Why would anyone finance a home at 13%?” My answer is the fantastic part of mortgage notes; nobody finances the original note at 13% but 13% is what you as the buyer of a discount note receive as the following example demonstrates. The returns in mutual funds can’t be guaranteed but t he interest can be guaranteed in a loan. Since mortgage notes are simply mortgages the interest is guaranteed by the collateral. If you are paying a mortgage right now you are paying guaranteed interest. How can you really plan for your retirement if neither you nor anyone else can tell you what your return will be? Fixed interest gives you the power of not only forecasting your retirement life style but increasing your comfort level while you are accumulating wealth. 6 WWW@AmericanNoteWarehouse.com JW@JWarr.com 512-308-3869
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