Self Directed IRA Investing

When I look at an opportunity to invest in something the first thing I want to know is.  What is my Yield going to be?

  I want to know for X amount of dollars I put in I will get back Y amount in return.  It’s not hard to figure out but you do need a tool like the HP 10bII.  The Yield on your investment is not the same as the Interest Rate.  I normally invest in Notes for my Self Directed IRA because they return a cash flow that I can collect and then re-invest it again.    When a bank loans out money, they do this to gain an interest rate in return, or their rent on their money.  To the borrower, it’s the cost of borrowing the money from the bank.  The banks return is the Interest Rate they charge. 

Here’s an Example:

You borrow $10,000 at 10 % interest.  The payment will be $200/mo for 65 months. The Lender or bank gets $13,000.00 in total by the 65th month.  A $3,000.00 gain in profit.

Yield is different, it’s the Return on Investement or ROI. 

When I buy a Note, I buy it at a discount to the Face Interest Rate and Face Value.  The Face Interest Rate is the same thing the bank charges, but when I buy that Note for less than Face Value I’m creating a higher Yield.  The Seller of the Note will sell to me for  a discount because they need cash today instead of next year. 

 Here’s an example using the same numbers as above to help illustrate my point.

You pay $7,000  for the $10,000.00 Note with a Face interest Rate of 10 % interest.  The payment will be the same $200/mo payment for 65 months.   The Yield is 25% because you paid less than the $10,000.00.  The Lender or bank gets same $13,000.00 in total by the 65th month but now you have a $6,000.00 gain in profit because you invest only $7,000.00 not $10,000.00.

I’ll make a post soon on how to use a Financial Calculator to plug these numbers in so you can do this for yourself.

 Will

This entry was posted on Tuesday, June 26th, 2007 at 11:14 pm and is filed under Investing Basics. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.