When we look at investing, we often get distracted by things like price, yield, etc. However, when we really boil down why we are investing, the true reason is that at the end of the day, we want cash flow. You may be thinking to yourself, "Buddy, cash flow is nice, but I want to increase my net worth."
I agree, having a large net worth is important, but what good is having a lot of equity if you are not getting enough income to meet your monthly needs? Therefore, every investor must be looking for ways to increase cash flow. Some of the ways that investors increase cash flow are by buying rental properties, lending money, or purchasing dividend stocks, to name a few.
Whatever the method, one has to know how to calculate the monthly payments in order to know how to increase their cash flow. In this example, we show an unorthodox way of increasing cash flow, by buying a mobile home, and then selling it on "owner financing" to an end buyer who then makes monthly payments to the investor (much like when a car dealership sells a financed car).
In this example, Vinny has purchased a used mobile home recently for $3,000 and has rehabbed and cleaned the mobile home, which has cost him $2,500, thereby costing Vinny $5,500 total thus far. Vinny sells the mobile home for $10,000 to Pete. Vinny takes $2,000 as a down payment from Pete and then Vinny finances the balance of $8,000 in the form of a fully amortized note, which will be paid by Pete to Vinny at an interest rate of 9% for the next 48 months. How much will Vinny receive every month from Pete?
Answer: Enter these numbers into your HP 10bii financial calculator.
N (Number of Months) = 48 (the note will be for 48 months)
I/YR (Interest/Year) = 9 (this is the interest that Vinny is charging)
PV (Present Value) = -8,000 (this is the value of the note, notice that it is a negative from Vinny's perspective as he is "lending" the money to Pete. If we looked at it from Pete's perspective this would be a positive number)
PMT (Monthly Payments) = ??? (this is what we are solving)
FV (Future Value) = 0 (this is a fully amortized note, so after 48 months the note is paid in full and there is no balloon payment)
After entering the above numbers in a financial calculator, the result is $199.08/months. This means that Vinny will receive from Pete $199.08 every month for 48 months as the result of this transaction.
After reading this, what ways do you know of to increase your cash flow? Please comment below as I would love to hear your ideas.
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