A Case Study on Notes — Video

What this episode covers

Here’s a case study on notes with a real client. Download Audio Transcript: These clients that I have have been investing with me for years. They have a very impressive portfolio of real estate, all of which will be free and clear in the next 8 to 10 years. They’ve got EIULs going, which will come to fruition in about 22 years. Again, very impressive income coming from them. They’re just getting started in notes, although they have again an impressive amount of savings to start with, around 300,000. Now, they are accredited investors and we’ll talk about that later, but for this case study, whether they’re accredited or not really doesn’t have an impact. Now, their first investments in notes, which will happen this summer and fall, will be that 300,000, which will generate 39,000 pretty easily so I’m just going to round 1,000 a year to 40,000. They want to retire when they’re 50 and I may have talked about these clients before. We argue all the time. They say they’re going to do it by 48. I’ve done the numbers and it’s 50, but they think they can do it. I’m going to take 10 years because they’re not in the room. They have 40,000 a year they just turned 40, just this month. Now, 40,000 a year the first year, so that at the end of the first year, that $40,000 is taxed and let’s say that 40,000 turns into 30,000. That 30,000 buys a small little note in addition to the 300,000. Now they’re not making 40,000. They’re making 40-something a year in interest payments. They take that and they buy another note and they end up with not 30,000, 30-something after taxes, and that’s the note they buy the second year. This goes on and goes on. By the 10th year when I say they’re going to retire, when they’re 50, in the spring of ’23, ’24, they’re going to have a trustee note income pre-tax, of give or take, $80,000 to $110,000 a year based on no note ever paying off, which in my experience, and I’ve been buying notes since 1976, when Ford was in office, that hasn’t happened. I’ve never seen it. I’ve never once seen a note go the entire 30 years. What probably will have happened in the decade between when they spend the 30,000 and start buying the little note every year with the payments is that sometime down the road, and who knows? It’s random, notes here and there will begin paying off. They will make a very nice profit because they’re averaging, give or take, $0.50 to $0.70 on the dollar when they buy them. They’re only going to be paying long-term capital gains taxes on the profits, so they’re going to be making significant hits even though it’s in their own names, not part of an IRA or a 401(k). If normal life happens the way I’ve seen it the last almost 4 decades of note investing, really by the time they’re 50, they won’t be doing 80,000 to 110,000 or so. They’re probably going to be doing 100,000 to 140,000, maybe more, but that’s realistic. Then what happens is because they hit retirement at 50, with 80% of their residential investments being clear, I won’t talk about the other two now because it was for another strategy, they can actually refinance those and pull out, give or take, another $800,000 to $1 million tax-free, $1 million easy is my guesstimate. Where it is still cash flowing very well, clearly not as much as without debt, but very well. They’re not to worry about that, but that $1 million instantly once they’re able to turn them into notes, will be generating give or take another 10,000 to 12,000 a month, in addition to their 80,000 to 140,000. I’ll give a range, that they built up just buying more notes with their payments.

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