This past weekend I was the keynote speaker for the Saturday NoteWorthy Convention. My goal was to demonstrate to the attendees just how simple notes can be. Just how easy and simple it is to get started in the note business as either a passive investor or an active investor.
To JUMP UP TO THE NEXT LEVEL.
I was able to articulate that the basics can be broken down into how one buys a note with a sense of security in mind.
What that means is focus more on Investment to Value (ITV) and Loan to Value (Loan to Value) vs just the ROI(Return On Investment) aka—yield.
An investor should focus on acceptable ITV or yield, WHICHEVER IS LOWER.
LTV tells a note buyer how much “skin in the game” the mortgagor has, or how much monetary or emotional attachment they have in the property.
ITV, on the other hand, tells the note investor how much he or she will invest in the note in relation to the value of the property. Yield is determined by the best and safest use of the note buyer’s money.
The amount of the mortgagor has invested, along with the value of the collateral and their credit score, will determine the ITV of the note buyer. Yield is the rate of return a note buyer demands when considering mortgagors’ credit, property value, and mortgagor’s equity and other risks.
When applying LTV, ITV and yield to the purchase of a note, all three are important and should be tied to one another. In other words, the down payment, credit score, value of the property, equity in property should be tied to the ITV and yield a note investor demands.
The more risk an investor incurs because of high LTV, the lower must be the ITV, and the yield must be higher. The note buyer will offer the lesser of the ITV vs. yield.
So, which is most important, LTV, ITV or yield?
The answer is that all are important and interrelate to one another.
Yield is determined by the best and safest
use of the note investor’s money. BUT….
YIELD IS NOT REALIZED UNTIL THE NOTE IS PAID OFF.