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 the 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 Interest Rate 6.00% Payment $300 Profit Cost Ending Balance Profit Per $1 Profit % 1 First Month $250 $50 $49,950 $5.00 500% 2 1st Year $2,983 $614 $49,386 $4.86 486% 3 5th Year $14,514 $3,473 $46,527 $4.18 418% 4 15th Year $39,484 $14,476 $35,524 $2.73 273% 5 30 Years $57,919 $50,000 Zero $1.16 116% All that baloney about time and amortization is there to bamboozle you. Your wallet can do the math or a fancy calculator 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 the 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
Here is an example of a note we have for sale. As you can see the original interest rate is 9.9% and the home owner still owes $26,171. She will pay $253.98 a month for the next 231 months. You can buy this note for $21,000 which is a $5,171 discount. Your LTV will be 40% and your interest rate is 13.4%. The reason your interest rate is higher than the owner is paying is you would have bought the $26,171 note for $21,000. The home owner 7 WWW@AmericanNoteWarehouse.com JW@JWarr.com 512-308-3869
has a contract to pay 231 more payments of $253.98. Since you only have $21,000 in the note the interest rate you receive is higher. When we are setting the price on our notes we discount each one enough to make it pay you at least 13% and it s guaranteed by the house which is the collateral. Per $1,000 Per Month The per $1,000 invested per month ratio on all our notes let you see how hard your money is working for you. What this ratio means is for every $1,000 you invest in the example mortgage note you will get a check for $12.09 per month (21 X $12.09 = $253.98). It is a way to compare and then decide in which note your money would be working the hardest for you. This is counter intuitive but the ratio has very little to do with interest rate. You would think that the higher the interest rate the more money you would get every month but that has more to do with the term of a note. I personally would rather have a $25,000 note at 6% for 10 years than the same note at 9% for 30 years because the payment on the 10 year note gets me my money back faster ($277.55 vs. $201.16). Banks understand how to get your money to work hard for them, that s why they pay about 1.5% interest on CDs. With a $21,000 CD at 1.5% if they would let you (which they won t) you could pull the same $253.98 for 7.2 years until it was all gone. In the mortgage note example you could pull out $253.98 for 19.25 years. The CD would have made $1,150 and the mortgage note would have made $37,669. Now that s what I call working hard wouldn t you? This is the greatest financial education there is. The advantage for you becomes clear when you are comparing one note against another to see how hard your money is working for you. Discounts Discounts can really energize your investment but before I talk about them we need to first look at the 3 things that can happen in a mortgage. 1.) The home owner stops making payments and you foreclose. George Bernard Shaw said If you can t get rid of the skeleton in your closet, you d best teach it to dance. This quote made me think about the one of first questions people ask when I talk to them about mortgage notes; What if the owner of the 8 WWW@AmericanNoteWarehouse.com JW@JWarr.com 512-308-3869
house stops making the payments? Well not only does this skeleton dance but it dances very well. Of the three options it will probably surprise you to learn that foreclosure is the most profitable thing that can happen for you, the mortgage note holder. I know this is not intuitive but let me explain. In the example above I talked about a mortgage note for $26,500 and 9.9% for 20 years. The value of this property was $52,000. The balance on the note if you bought this note was $23,565. If you bought the note for $21,000 and the owner never made a single payment you could foreclose on the property. You have $21,000 in a house that you now own. The house is worth $52,000. There are literally hundreds of thousands of people in the United States at this very moment trying to find $52,000 houses that they could buy for 70% Loan To Value ( $36,400). You now have two options of what to do with this house: 1.) You could advertise it and short sell this house at 70% of its value $36,400. If you have $21,000 in a house and you sell it for $36,400 even after paying expenses you can see this was a very profitable thing to do. 2.) The best thing to do is to offer the house for sale and owner finance it. There are two rules in real estate that apply to owner finance property 1.) You can sell your property for a premium; you can actually sell your property for whatever you want. 2.) Your property will sell quickly. The reason you can sell your property for whatever you want is there are no appraisals needed. You are the bank. It would be very easy for you to sell this $52,000 house for $62,000 take $5000 down and finance $57,000 for 15 years at 8%. The payments would now be $544.72 a month for the next 15 years and you have $5,000 less in the property than you had before. $544.72 a month for 180 months means that you will receive $98,049 for your original $21,000 investment. This sounds almost too good to be true but to tell the truth foreclosure is very rare. The two reasons that foreclosures are very rare in small notes are: 1. The owner of this house has over 50% loan to value (equity). 9 WWW@AmericanNoteWarehouse.com JW@JWarr.com 512-308-3869
2. The payments are only $253.98 a month. Before this owner would ever let you foreclose on him he would simply short sell the house himself and put all the money in his own pocket. Where would this owner find a place to live for less than $253.98 a month? So the odds of getting a foreclosure are not very great. 2.) Owner sells or refinances Where the odds are in your favor as a small mortgage note owner is that the average person refinances are sells their house every 5 to 7 years. When they sell their house to get the lien released they must pay you the remaining balance on the original amount. What that means is you get the discount immediately. You do not have to wait the full term of the note to make your profit. By shortening the term your yield goes through the roof. When they refinance or sell the house you make a lot more money. This is the amazing reason we specialize in small mortgage notes under $50,000. Since paying off a loan early is very profitable for you the note holder then the more small notes you have the better the chances are that the home owner will refinance or sell the house. This only gets better. The note above pays about $12.09 per $1,000 invested per month. There are 21 $1,000 units times $12.09 but if the owner payoff is $25,000 you now have 4 more unites to invest in the next note. If it also paid $12.09 per $1,000 unit ($12.09 X 25 = $302.25) so you could collect about $302.25 per month. This is starting to compound off of your original investment of $21,000. 3.) The loan goes term. The owner makes all of the payments In reality the worst-case scenario is they pay all their payments and you collect 13.04% interest on your money. As you can see all the results are in your favor. When you think about investing in the stock market you ve got to consider that you re gambling on a return. Since past performance is no indication of future performance, you could lose your principal. Banks don t like the sound of the Warning on investing. Remember banks lend money out, get collateral at a good LTV and get paid a fixed interest rate for a fixed term. When you buy a small 10 WWW@AmericanNoteWarehouse.com JW@JWarr.com 512-308-3869
mortgage note there are no fees there are no charges the return you get is guaranteed fixed interest and the average LTV is 40%. The small mortgage notes that American Note Warehouse brokers range from $10,000 to $49,000 so it doesn t take much money to get started and with these high interest rates it doesn t take long to build up enough to buy another note. Each time you buy another note the buildup time shortens. Mortgage Notes work great in qualified plans. You can roll your 401k or IRA into a self-directed IRA without taxes or penalties. Your IRA would then own the notes and would collect the payments each month. This will greatly improve your retirement years. How Real Estate Investors Can Build Equity Using Their Current 401k Money The number one problem with your 401k is you are locked into the stock market. You would not be a real estate investor if you thought that the stock market is a good place to invest. Face it-there is nothing backing up your investment in the market; there is no collateral. There is only one guarantee and that is Past performance is no guarantee of future performance and you could lose your principal. For you, hard assets are the answer to how to make your retirement money grow. Unfortunately, the 401k that you must invest in at your current job does not let you invest in real estate. But don t be discouraged. ANW (American Note Warehouse) has a very simple way to get money out of your 401k at any age without penalty or taxes. In this booklet we teach you how to use your 401k money to invest in real estate and build equity while using the same money over and over again. There are no classes to sign up for or CDs to buy. It will all be here in this free booklet. Most 401ks allow employees to borrow from their own money. They have to pay it back at around 4% interest but the interest goes into their own account. For example, let s say you borrow $25,000 from your 401k. This is not considered a 11 WWW@AmericanNoteWarehouse.com JW@JWarr.com 512-308-3869
premature distribution (before 59 ½) because you borrowed it and you are going to repay it to your own 401k. You locate a house you can buy for $20,000 at a short sale and spend $5,000 on repairs. You now rent the house out for $750. You have to pay back the 401k so you create a note for $31,000 amortized for 30 years with a balloon in 5 years at 9% with payments of $250 and let ANW find a buyer for the note. You will have to discount the note 10% or $3,100 so a discount note buyer will pay $27,900. ANW charges a flat fee of $2,000 to facilitate this transaction. You then pay back your 401k the $25,000. You now own the house with a $31,000 mortgage. If you rent it for $750 and your note payment is $250 your gross cash flow is $500 per month. You are now building a real estate investor s two favorite things: equity and positive cash flow. This next step will astonish you. I am about to tell you in three words how to end up with 10 to 15 of these equity building and cash flowing houses at great LTV between now and the time you retire using the same money over and over again. Are you ready for the words? REPEAT! REPEAT! REPEAT You paid your 401k back, now borrow it again and do the same process. Now you have 2 houses cash flowing $1,000 per month and building equity. You never had to deal with a hard money lender or a bank. You never had to qualify for a loan. You never paid any tax or penalty on the money you borrowed and your 401k grew at a guaranteed rate because you paid yourself 4% interest. Here is one of the best reasons to work this plan; the money you used and the houses you own are no longer in a qualified plan so you can retire anytime you wish without premature distribution penalties or income taxes. The System For Your IRA 12 WWW@AmericanNoteWarehouse.com JW@JWarr.com 512-308-3869
IRAs are a different animal and can t be used like a 401k. Because you can t borrow money from your IRA you can t work the system I just described. However don t be discouraged. There is a very easy way to participate in this stock market escape plan and grow your retirement funds using real estate. That escape plan is called discounted mortgage notes. The instability of the stock market and low interest rates are causing people to look for safer, higher yielding investments. Many know that real estate investing fits that bill. Common sense tells us that real estate is a great place to invest. There are some training programs you can buy that will teach you how to buy real estate but knowing how and actually doing it are two different things. A mortgage note/real estate note is a promise by a new buyer to a seller to pay a debt, with the promise secured by a mortgage, trust deed or contract. For example, if an investor owned a property free and clear and decided to sell the property by accepting a promise for payment in the form of a mortgage rather than cash or a bank loan, then a note would exist. Given how difficult it is for most people to qualify for a traditional loan and the bank s refusal to finance small mortgages, this type of seller financing is becoming more prevalent. Example: An investor owns a property free and clear that is worth $70,000. The investor finds a buyer who wants to purchase the house but doesn t qualify for traditional financing (due to being an independent contractor, business owner, or switching jobs recently or banks will not lend small amounts on mortgages). The buyer puts down a down payment of $10,000 and a 15 year note is created between owner financer and the buyer for $60,000 at an 8.5% interest rate, generating a monthly mortgage of $590/mo. The buyer is paying higher than market value for their interest rate, but is still happy because they want the house, can afford the monthly mortgage, and would not have been able to purchase the home conventionally. The note seller is happy because they received a sizeable down payment and will be receiving $590/month cash flow for the next 15 years. 13 WWW@AmericanNoteWarehouse.com JW@JWarr.com 512-308-3869
After 8 years the home owner still owes $37,090. Now let s say the note owner needs $32,000 cash for whatever reason. They have a note for $37,090, but cannot access the equity since they sold the property to someone else. How can they receive immediate cash for a $37,090 loan? They can sell this performing residential real estate note at a discount in return for immediate cash. The note holder receives $32,000 cash for their asset, which gives them the cash they were seeking. The buyer of the discounted note will collect 84 payments of $590 or $49,560 at an interest rate of 13.45%. Go to http://bit.ly/12q0lxj to see the 3 things that can happen in a mortgage note. Benefits of Mortgage Notes/Real Estate Notes Purchasing notes is safe because the note is performing and there is significant equity in the property, so if the buyer defaults, it can be resold quickly. Since no property is being purchased, no rehab is needed. Since no property is being purchased, you don t pay property taxes. Finally, as a note buyer, you are not a landlord; rather you are the note holder, and as such, you are not responsible for any of the maintenance or wear and tear that happens to the house. The first step is to set up your IRA as a self-directed IRA. The IRS allows you to self-direct your investments. The IRS rules have always allowed you to invest in anything you want with the exception of life insurance or collectables. Since discounted mortgage notes are not considered securities like stocks you don t need a securities broker to manage your money. Because most people don t have large amounts in their IRAs they get better service if they manage it themselves. ANW facilitates the sale of small discount mortgage notes. By small I mean $10,000 to $50,000. You can roll your old 401k or IRA into a self-directed IRA without paying any penalties or taxes. ANW can help you with this process and give recommendations. Once this easy process is completed you simply order a list of notes. You never sign a contract or pay any fees to ANW. The price you see on the list is the price. We will pay all closing costs and for the title insurance. 14 WWW@AmericanNoteWarehouse.com JW@JWarr.com 512-308-3869
When your IRA starts to receive payments you can direct them into a money market account inside your IRA so it accumulates interest. When there is enough accumulated in your IRA purchase another note and repeat the process. Now you have two notes paying into your IRA which means it take half as long to buy another note. Every time you buy another note your cash flow increases and the time it takes to buy another note decreases. This system accelerates and compounds. By the time you are ready to retire you can have a nice guaranteed income. There are a lot more of these common sense solutions if you want to hear more or would like a current list of notes drop me a line. 15 WWW@AmericanNoteWarehouse.com JW@JWarr.com 512-308-3869
American Note Warehouse www.americannotewarehouse.com JW@AmericanNoteWarehouse.com 512-797-7869 16 WWW@AmericanNoteWarehouse.com JW@JWarr.com 512-308-3869