Knowing the concepts of the Time Value of Money can help achieve astronomical yields. We measure the relationship of the Five Variables applied to the Time Value of Money. As a quick review the five variables are:
N = Number of Periodic Payments I/YR = Yield PV = Present Value PMT = Amount of Periodic Payments FV = Future Value
As explained in The Note Professor Notebook, these variables relate to one another. When one variable is changed, another variable is affected.
In this issue I am going to concentrate on PV, N and I/YR. More specifically, how a small decrease in PV will translate into “Obscene Yields” when N is a small number.
Let’s take a real example of how I applied the concepts of the Time Value of Money to achieve a WHOPPING 138.65% yield. Better yet, it was tax free.
Scenario: I was lease optioning a condo at $700 a month. When I was paying my rent at the first of the month, I approached my landlords with the offer to pay them three months in advance if they would discount my rent by 10%. A little math tells us that $700 x 3 months equals $2,100. Subtracting 10%, or $210, from this total leaves us $1,890.
A point to remember: Unlike mortgages that are paid in arrears, rents are paid forward. This is what is called Annuity Due. To calculate Annuities Due, we must place our calculators in the BEGIN mode. Let’s see what this transaction looks like from my point of view, as well as my landlords.
N = 3 Months I/YR= 138.65% WOW PV = -$1,890 Amount Paid in Advance PMT = $700 Rent Payments I Put In My Pocket FV = 0
NOTE: A 10% Discount for Three Months in the BEGIN mode will ALWAYS produce a 138.65% yield. I LOVE AMERICA.
Let’s break this down. The landlords took only a $70 a month discount in order to receive a lump sum of cash for three months. I, on the other hand saved $70 a month, which translated into a 138.65% yield.
To put it another way,
in three months I saved $210 to invest in other transactions like this one.
Question: What would your yield be if you borrowed the money from you bank, friend or even your credit card for three months. Your yield would be “infinity” since you would have no money of your own invested. The symbol for infinity is the number 8 on its side. Hence, the phrase your return is a “Lazy Eight”.
You can apply this technique to almost anything. For example, one of my students uses this technique to pay her hair dresser. Still another student uses this technique to pay his yard man. The same principle applies to “two for one sales” or “buy two and get one free”. If you use the products, think about taking advantage of these deals, and with the money you save, invest in similar deals.
Along the same lines, a franchise hair cutting business offers to cut hair for $15. However, they offer to sell 5 cuts for $60, and better still, you could purchase the discounted price at the time you received your first hair cut. This is another Annuity Due scenario, which means your calculator should be set in the BEGIN Mode. Here is what this transaction looks like:
N = 5 Number of Hair Cuts I/YR= 151.08% AWESOME PV = -$60 Amount For Paying In Advance For a Discount PMT = $15 Regular Price for the Hair Cut FV = 0
Are you noticing the relationship of N, PV and I/YR? When N is a small number, a slight discount in PV will translate into “Obscene Yields”. For a little calculator practice; the above scenario was based on getting a hair cut once a month. What would your yield be if you got the hair cut once a week?
Another one of my students applied the concepts of the Time Value of Money to loans. One of his tenants, who also worked for my student, mentioned his daughter wanted a bicycle for her birthday, but the tenant did not have the money to purchase one because the price was around $200. It just so happens my student was at a city police auction that weekend and found an almost new girl’s bike that he picked up for $75.
He offered the bike to his tenant for $15 a month for one year. The tenant was pleased and upon receiving the bike, immediately gave my student $15. From what I was told, the young daughter’s eyes lit up, and jubilation took over her from head to toe when the bicycle, along with a pink ribbon on the handle bars, was presented to her on her birthday.
Happy story for all. We know the tenant and his daughter were overjoyed, but how did my student come out.
Let’s look. Remember, since my student received the first $15 immediately upon selling the bicycle, we will put our calculator in BEGIN Mode.
N = 12 Number of Months the Bike Was Finance I/YR = 203.31% Double WOW PV = -$75 The Amount My Student Paid for the Bike PMT = $15 Amount of Monthly Payments with The First Payment Immediately Upon Receiving the Bike FV = 0
Here is another example of how when N is a small number, small discounts translate into astronomical yields. When giving my presentation on “How To Obtain Obscene Yields with Small Money” at a national note convention, I asked my audience what they considered to be “small” money. I was flabbergasted when I got answers like “$20,000″, $50,000”, with the smallest amount being $5,000. If you fall into this category, simply add zeroes to the above case studies.
For example, after hearing my presentation, I got an email from one of the attendees telling me how his handyman’s truck had broken down, and the handyman did not have the money to immediately purchase another. My attendee found a used truck that was in good condition, and could be purchased at a discounted price of $3,000. He sold the truck to his handyman for $5,000 with 36 payments of $138.89. Although my attendee realized ONLY a 36.86% yield, his primary purpose was to provide his handyman with an affordable vehicle to get to and from my attendee’s rent houses. By applying TIme Value of Money concepts not only did my attendee solve the problem of transportation to and from his rent houses for his handiman, he enjoyed a 36.86% yield.
Summary: When N is a small number, a slight decrease in PV will increase I/YR to astronomical levels. It makes no difference if you are dealing with $30, $3,000 or even higher. Knowing how to apply the concepts of the Time Value of Money will solve problems, while at the same time increase your wealth.
If you have questions or comments, be sure to CONTACT ME I get the topics for my newsletters from your input.
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Tom Henderson
a.k.a. THE NOTE PROFESSOR
