Coupons!!!

[exec927]

I was wandering what you guys think about Zero coupon bonds.I know someone that does it he says its a great way to do deals.Please express your comments on this...Thanks and Godbless

[dealmaker]

I'm assuming you're referring to Treasury STRIPS?

HOW does your friend say he uses them?

Zero coupon bonds are OK, fixed income instruments. It's not a good idea to own them outside of an IRA or other tax sheltered vehicle. The reason for this is that the interest accrues to them monthly (maybe quarterly, I don't recall exactly), but it's only accruing, not being paid. So depending on the, time to maturity and interest rate you may be buying a treasury at 75% of face value. At the due date you would receive $10,000. But you would have been paying taxes on it all along EVEN THOUGH YOU DIDN'T RECEIVE THE MONEY. Hence the suggestion to keep them tax sheltered.

Once upon a time I remember one of the national "gurus" saying it was a good idea. However, Treasuries sell at a discount from face value. So a $10,000 face value, due in Oct 2010 would be worth about $7,800 today. I think the guru was trying to make the point that you could TELL the buyer he was getting $10,000, even though the bond only cost you $7800.

The above scenario depends on a buyer who is less than astute. I know that those people exist, but if you find a buyer willing to take 78% of par, there's better ways to do it.

Not meaining to be negative. Just trying to understand what your friend is saying he's doing. Ask him. Please report back.

dealmaker

[exec927]

He uses bonds to buy REO's Repossessed prop. and FSBO's and properties with realtors.he says he pockets 10%-20% of the purchase priceevery time he buys.Buys a homefor low money for $165,000 and walks out of closing with an equity of $12,000 and pockets $27,000 in cash...He states Seller benefits Lender benefits buyer benefits and realtors benefits.

Any pros that have any experience with Zero coupon bonds please respond.

Thanks and Godbless

[Just Information]

The new get rich overnight investing strategy using zero coupon bonds for buying real estate.

Bonds are a form of indebtedness that is sold to the public in set increments, normally in the neighborhood of $1000. In return for loaning the debtor the money, the lender gets a piece of paper that stipulates how much was lent, the agreed-upon interest rate, how often interest will be paid, and the term of the loan.

Zero coupon bonds don't pay out any interest prior to maturity. These bonds are sold at a deep discount because all of the value from the bond occurs at maturity when the principal is returned to the bondholder along with interest.

One type of zero-coupon bond is a "strip." The interest payments are separated from a bond's principal and multiple zero coupon securities are created, one representing the principal amount and one representing each coupon payment. A problem with zero-coupon bonds is that, even though you do not receive any interest payments during the time you hold the bond, you are still responsible for paying taxes on the suggested interest you are earning. The taxes are based on the appreciation of the bond's market value, which will increase consistently as it approaches maturity.

Zeros are also more volatile than bonds that have regular interest payments. The main benefit of zero coupon bonds is if you are saving for a specific event that will occur at a specific time, such as paying for college. You can purchase the zero coupon bonds to mature just before you will be needing the money.

This is just an old twist of trading something of value for real estate - this will not make doing deals any easier - you are still faced with convincing a property owner to trade the property for your bonds.

Now ask yourself one essential question is Zero coupon bonds free?

Bond terms run normally for 10, 15, or 20 years.

Now ask your self-why would the property owner wait 10, 15, or 20 years for the return?

Interest rate/term length - LIBOR plus 1.5%-3.5%

So ask your self this one thing wait 10 years to get 6 to 10% return on zero bonds, hold the property for 10 years based upon property appreciation, owner finance the deal, sub 2 the deal, just place it in a trust or better yet find a money investor to back the deal!

Folks this is just simply a new buzzword of an old investing strategy!
It's just a tool! No a quick fix!

[exec927]

Thanks John for your knowledge and comments on the subject...I have purchased a book on zero coupon bonds I should have done my due diligence first.It seemed like a great investment,the author was talking about overcoming negative cashflow,and getting cash back.....Anyways thanks for the expertise.

Godbless

[Just Information]

From what my students have told me this sounds like a new twist to the no money down techniques.