Special Note: The examples are a few years old when some of my investment yields were higher. The examples work the same way at lower yields, because the financing and cost of money are lower. I work on the spread between my cost of money with banks and investors and the yields I can purchase at. The spread stays about the same when yields rise and fall and the examples hold true.

"The best things in life are free" usually applies to non-material items. I agree with that definition and could write several newsletters on that subject. I would like to show you some material things that ARE free!

FREE CARS

The greatest profit in "paper" is to find a way to immediately realize all or a portion of the discount in the note immediately. To do so raises your rate of return tremendously. Let's look at a way to turn the discount in a note into a quick profit.

Your local banker has a problem and he needs you. He has cars and other items that he has repossessed and needs to sell. He usually takes losses and will be real excited to learn he doesn't have to.

The scene begins like this. First, you begin to build your paper portfolio. Using many different techniques, buy or get control of some real estate paper that you can trade. Next, approach your local financial institution and see what they have that they would like to liquidate.

I approached a credit union recently and they are excited about the possibility of trading paper for their repossessed cars.

The approach is simple. If they buy a note from me at a yield of 11% then I will take 20% of their proceeds and buy their worst headache.

The benefits for them are simple. I buy their problems from them at market value or their "book" value. they do not take any loss and they get immediate cash. They also purchase a good safe note with a good rate of return.

The benefits to me may not be clear until you see the numbers. Let's say that I have a $20,000 note and my banker has a $4,000 car. Here's the note:

$20,000, 11%, $227.32, 180 mo.

If I could purchase the note for a 15.3% yield, then I would pay $16,000. This means I pay $16,000 and then immediately sell the note for $20,000. I take my $4,000 profit and buy their car. Their headache became my free car.

$16,000, 15.3%, $227.32, 180 mo.

What's even nicer is that I can buy most notes at an 18% yield or better. If so, that means I will walk away with an extra $1,884 in cash for gas money for my new car.

$14,116, 18%, $206.08, 180 mo.

Another possibility would be to deviate from the ratio and purchase a $5,000 car and pocket almost $900. That is about a 4:1 ratio instead of the 5:1 ratio.

FREE HOUSES

This technique works with any kind of property that the banker may have. Who cares what the property is, it's free! We also have a bank that will do the same thing with their foreclosed real estate. For example, multiply the last figures by 100 times. Free houses can be nice too!

FREE LIFE INSURANCE

How would between $200,000 and $1,000,000 in free life insurance sound to you? Does that fit the definition of "HAPPY NEW YEAR?" Here's how:

Let's say you borrow $7,058 in equity out of your property and invest it in a $10,000 note. If the note paid $113.66 per month for 180 months, your rate of return would be 18%. If the $7,058 were borrowed at a 12% interest rate, the payment would be $84.71 per month. The difference in cash flow would be $28.95 per month - enough to buy about $200,000 in term life insurance for someone 30 years old.

Multiply the figures by 5, borrow about $35,000, buy a $50,000 note and have enough cash flow for $1,000,000 in life insurance. In addition, you have added $50,000 in paper to your portfolio that you can use to make further profits - like trading for a free car.

FREE CASH FLOW

Here's how to buy a note (real estate, contract, Trust Deed Note or Mortgage Note - "paper") and get paid to do it. Financing real estate paper can be easy and profitable. These are the terms of the note we are going to buy.

$20,000.00 balance, 12%, $220.22 per month, 240 months

When discounted to yield 21%, this note could be purchased for $12,388.16. In other words, in the market place, when someone sells this note (let's say it's a Trust Deed Note), it is worth $12,388.16. You can buy this note - and do it for free.

Find one or more investors that would be happy with a safe, secure 16% rate of return. In this example we will use two investors. They will receive a monthly cash flow secured by real estate.

Buy the Trust Deed Note with the money from the investors and secure their investment with a note you are buying. Their note is secured by the Trust Deed Note which is secured by the real estate. The total monthly payments to the investors will be $172.35 and the payment coming in will be $220.22 per month.

Option 1 - Pocket the cash flow
The difference in the monthly cash flow is $47.87 per month for 240 months. This totals $11,488.80 which isn't bad for a free cash flow. Picture how nice it would be to do this with 10 notes.

Original note - $20,000.00, 12%, $220.22, 240 mo.

Investor note - $12,388.16, 16%, $172.35, 240 mo.

(This consists of two notes of $6,194.08 - 86.17/month)

Option 2 - 100% finance - early amortization
If the cash flow is all put toward paying the investor loans off, they will be paid in 43 months (3.58 years). At that time, the full $220.22 will come to you - for the next 197 months (over 16 years). The total of the payments that you receive would be $43,383.34.<

$12,388.16, 16%, $220.22, 42 mo.

FREE CASH

Finance the amount the cash flow will cover instead of just the cost (which is less). At the rate of 16% over 240 months, a payment of $220.22 per month would amortize a loan amount of $15,828.86. Subtract out your purchase price of $12,388.16 and that leaves $3440.70 cash to fill any empty space in your wallet. On top of that, you have equity in the note of $4171.12. That means you have BEEN PAID over $3400 cash to buy a note that you'll have over $4100 equity in.

TAX FREE

The cash in your hand is tax free (at the moment) because it's borrowed money. Also, almost anything you do with paper can be tax free through several ways.

Let me tell you about two of these ways.

#1 - Corporate Pension and Profit Sharing Plans
You can invest in "paper" through your Corporate Pension and Profit Sharing Plan. The profits are totally tax deferred until later.

#2 Self Directed IRA's
"Self directed" Individual Retirement Accounts (IRA's) can be set up existing accounts can be changed to a self directed plan. If your existing plan is with a bank, you may be able to work with them or for no-penalty, you can change the administrator to a company that specializes in self directed accounts and will allow you to call the shots as to where and what your IRA invests in.

© 1999 Cashflow Specialists. All rights reserved.

John D. Behle, is one of the premier educators and practitioners in the field of "Real Estate Paper". John has an extensive background in consulting and coaching. In addition to the original "The Paper Game" book published in 1982, he is the author of 7 other books, several home study courses and over 200 nationally published magazine and newsletter articles on paper investment. You can visit him on the web at www.papergame.com.