Because paper is everywhere. Because paper is the single largest business on the globe. Because we are confronted by paper everyday in hundreds of ways; we just don’t recognize it. (I am about to change that for you.) Because paper is a source of cash flows and profits. Because paper can be a predictable and determinable income stream for us.
To know paper is to know the single biggest source of wealth on the planet. There is an unlimited supply of paper with more being created daily around the world. Paper backed by real estate (and properly purchased) can be a very secure investment. The investment yields generated by paper are easy to calculate. Paper is very low management when the payments are on time. There are lots of creative things that can be done with paper not only when it is created; but also while it is being held and when it is sold. That s the good news.
The bad news is paper can be a real fire drill if you have not done your homework and/or if the payor should default (ask Wall Street and the globe’s bankers who do not understand paper fully.) Unless you do your homework thoroughly, paper is complicated enough to bite you badly. You must be absolutely certain you are getting 100 of what you paid for. Unlike real estate ownership there are no tax benefits from owning paper. Another downside of paper is when the last payment of the note is received, the income stream stops forever. Like any other investment, the investor needs to be extremely careful, have complete paper work and understand the security or the collateral. Remember, if it seems too good to be true; it s not.
In order to bring each of us up to speed, let me discuss briefly the essential basics of Paper.
The definition of paper is any document that records a promise of payment sometime in the future.”
Examples of paper would be IOU. s, checks, (demand deposit,) stocks, bonds, certificates of deposit, social security, pension plans, IRA s, Keoghs, leases, options, puts, calls, derivatives, Treasury notes, Treasury bonds, account receivable, timber rights, mineral rights, tobacco allotments, deeds, options, mortgages and deeds of trust, to name a just few. My favorite form of paper, over the years, has been notes secured by Mortgages or Deeds of Trust.
As you can see from the above list, paper defines the terms and conditions of an income stream. Paper is a promise of future payment(s). Another way of putting it would be to call them annuities.” An annuity is a single payment or series of payments sometime in the future.
Annuities (income streams), each and every one of them, have TWO critical items and only two : N s (number of payments and payment timing) and PMT s (the dollar amount of each promised payment). That’s “N’s” and “PMT”S.” This is what you get every time you buy paper – “the GIVENS” – the paper (note or contract) states the “givens” – so many N’s (monthly payments) of a PMT (the payment amount.)
So far, so good.
The next concept you need to know is the concept of present value theory. It is simple. A dollar in the future is worth less than a dollar today.” Therefore, when we purchase the right to receive a single payment or a number of payments, we should always pay something less than the total amount promised. Sounds like discounting . It is; which is the next topic.
Discounting is the mathematical process of reducing all future payments down to today s (present) value in order to reflect the impact time has on money. The greater the time span until we receive the money the less it is worth today.
All of this is nice, Jay; so what? Well, if paper is a promise of n s and pmt s sometime in the future, wouldn t it be great if there were a way to mathematically discount all those future payments to today s dollars and at the same time show us the yield (return) on our monies invested? There is a way.
Financial calculators have been around since the early 1970’s. Hopefully, you have one that you can operate. (Today, in 2009, I have an image of a functioning HP 12c financial calculator on my the Desktop of my laptop. It is never out of reach. Once you grasp and fully understand that paper is nothing but a series of n s and pmt s (look for these keys on your financial calculator) you can easily determine how much to pay to achieved a specified yield. Or you can calculate the yield if you know the price asked for an income stream (n s and pmt s). Remember, whenever you buy Paper , you are buying the right to receive a specific number ( n ) of payments consisting of specific dollar amounts ( pmt ). Learn to use a financial calculator well. If you cannot use one, just remember: your completion does.
That s it, my friends. That is as succinctly as I can put it. Next week I shall give you an example or two of real world paper. And then some terms and conditions surrounding paper.
Good Luck, Good Opportunities and Good Papering,
Jay
Author Resource:
Jay Turner has been involved with Real Estate, Paper and Small Business Counseling since 1965 and has been active as an investor, businessman, owner, teacher, lecturer, writer, and author on the subjects of real estate, paper and kitchen table entrepreneurialism as well as a counselor.
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