Its been a while since I’ve made a video on using Excel, so I wanted to get a new one out there. I recently exited from several note deals and put together deal summaries for each of them to send to the joint venture partners. In the deal summaries I show both the ROI and the annualized return.
The ROI is simply the profit on the deal divided by the amount invested. For example if $20,000 was invested and then $22,000 was received upon the exit, then the profit is $2000 and the ROI is 10% ($2000/$20000). While the ROI is obviously important it doesn’t tell the entire story. If it took 3 years to achieve the 10% would that result be acceptable? What if it only took 6 months?
To get a better idea of the performance I look at the return on an annualized basis, and use the XIRR function in Excel to do this. What I like about the function is how simple it is to use, and also that it makes it easy to calcuate annualized returns even when there are other cash flows in the deal, such as payments received or when a portion of the capital is returned early.
In the coming weeks I’ll create new case studies for the recent deals. I was very pleased with their results, although my main takeaway from the recent deals I have analyzed is how much the timeline affects the annualized return the JV partner receives. Changing the deal duration by a single month can change the annualized return by 2-3%. Returning unneeded reserve funds as early as possible also has a huge impact. Typically the JV partner provides reserve funds for foreclosure expenses. In some cases the note reperforms and foreclosure becomes unlikely. Returning those reserve funds once the loan has been reperforming for a few months can change their annualized return by over 6% versus waiting to return it after the note has been sold. For those loans that are reperforming, paying out 50% of the interest that is coming in on a quarterly basis also has a huge impact on the JV returns.
I’ve always tried to be efficient in how I work deals and bring them to a conclusion. As my processes have improved and as I’ve found better vendors over the course of 2019 I’ve been able to speed up the timeline for onboarding a note, getting through loss mitigation and then either onto a forbearance agreement or into the legal process. I plan to tighten it up even more in 2020.
To learn how to use XIRR when analyzing your own deals, see the video below:
Due Diligence Training Course Coming Soon!
I’ve had a project in the works for some time now that I haven’t talked about publicly. Its an online training course to give note investors everything they need to quickly and accurately perform due diligence on a note. As I have been selling more and more reperforming notes, one thing I have noticed is that many note buyers aren’t sure about how to do their due diligence. Not being comfortable with due diligence is the number one thing that stops people from buying their first note. When people have asked me about where to go to learn this I haven’t known what to tell them. Many of the offerings out there are either lacking detail and too superficial, or phenomonally expensive. Some are both…. One of my missions as we head into 2020 is to make note investing more accessible to the individual investor. This training course will be part of that. The intention is to give people the knowledge and confidence they need to get over the hump and close on a deal, provide more information on this topic than any other offering, but deliver it at a price point that makes it worthwhile even if you only buy a single note. There will be a combination of videos, checklists, and maybe some automation tools. Right now the content is about 90% complete, and it will go into beta testing with some select folks over the next few weeks. I’m not sure yet exactly when it will be released, but stay tuned. If there are any particular due diligence topics you are struggling with or want more information on, please drop me a note at dan@fusionnotes.com, or give me a call directly at 720-988-8024.