Wrap Around Loans

If you know how to use a financial calculator, you have a very powerful tool for building profits in both discounted notes and real estate. As mentioned elsewhere, we like the Texas Instruments BA II+ or the Hewlett Packard 10b. Using either calculator, you can easily solve the problems below.

All sophisticated note and real estate investors should understand Wrap Around Loans. A “Wrap Around” or “All Inclusive Deed” or “All Inclusive Contract for Deed” wraps around another loan called the underlying loan. For example, on an investment home there may be a $50,000 underlying loan written at 10% interest. You could place a $20,000 second loan on the property with interest at 12%.

Or, if you are a sophisticated investor, you could place a $70,000 “Wrap Around” loan on the property. Your $20,000 is “wrapping” the $50,000 first loan. The payor would pay you the payments on the entire amount and you would pay the payments on the underlying note. The effect is that you will make 12% on your $20,000 second and 2% on the underlying $50,000 first.

You can use this knowledge to buy a note for “No Money Down.” Here’s how: Buy a house for $100,000 with $10,000 down and a 7.5% interest rate. Then assume or create the following 10-year loan:

#1: Clear Your Calculator. Calculate the payment on your new note.

120 7.5% -90,000 $___ 0
This is your monthly Payment.

You then sell the house for the same $100,000 with $10,000 down, and you carry back this note at a 11% interest rate:

#2. Calculate the payment (PMT) on your new note.

144 11 -90,000 $___ 0

Your $90,000 is wrapping the note held by the person who sold you the property, but you are getting higher monthly payments. The effect of this is that you get back all of your money when you sell the property and you get the benefits of the wrap.

• You get $59.88 for the next 120 months.
• You get 24 months of $1,128.20, all with no money invested.

What You Have Learned: Wraps are very powerful and as real estate begins to look like an improving investment, we should learn to use them to make fantastic deals on property.

Box # 1: Pmt = $1,068.32; Box # 2: Pmt = $1,128.20

This entry was posted in Investing in real estate notes, Main blog. Bookmark the permalink.