Tall Tails

(by John D. Behle)

(( The following article is an excerpt from John's book "Creative Paper Formulas" ))   

At our educational seminars I've seen how excited people get when they see a concept often referred to as "Tails." The name describes buying the "tail end" of a note.   We've talked about buying partials and usually described the benefits of buying the first part of a note. There can be some great benefits in acquiring the end part of a note. In some cases, it can be a "no cash needed" way to build a retirement income.   

Would you be interested in seeing how to get a free monthly cash flow of over $400 per month for 15 years? If you don't, you better stop reading right now and make an appointment with your doctor.  

 Let's buy a $50,000 note that pays thirty years and sell off the first 15 years to cover more than the cost of the entire note. This makes a no cash investment in a 15 year cash flow that begins in 15 years. 

The first line shows the $50,000 note and it's terms.  The second line shows the price we would pay to buy it at a 16% yield. The third line shows what the note would be worth if we sold the first 15 years to an investor or institution.

PV                     %I                        N                      PMT                     FV

$50,000	10%	360	$438.79	- 0 -
$32,629	16%	360	$438.79	- 0 -
$32,948	14%	180	$438.79	- 0 -

This shows that if we buy the whole note for $32,629 and sell off the first half for $32,948 we would have a no cash deal and $319 to cover any costs. We are left with payments of $438.79 per month that begin in 15 years and pay us for 15 years. A free cash flow that just took us some creativity.   

For those who claim little cash to buy notes, this takes the air out of their argument. There are numerous other ways to invest in paper when your own funds are limited.   Tax Free   If all of this were done through your self-directed IRA, you can have a tax free cash flow. If you are not currently using your IRA to invest in notes, you are losing one of the best benefits available to you.   

How is a "self directed" IRA different from the one you have now?  Trick question.  It isn't different at all.  The only difference is whether you are taking an active role and choosing your investments or leaving the decision to some banker to do it for you.  You can do a "Trustee to Trustee Transfer" and work with a company that is set up to help you (not themselves).  This transfer is not a "rollover" and there are no limits or penalties associated with it. If you would like some more information on tax free profits, drop me a line.  

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