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Safe & Profitable Way To Invest In A Changing Market
This one’s pretty timely. We’ve got some changes in the marketplace here that are coming up and this is one of the things that I study. I’m a research guy. I’ve done that for a long time. I’m always looking for trends here. Quite frankly, I’ve gotten burned by not doing that in the past and understanding the trends and how they could possibly affect you, your business and your investments. I’ve become a student of that over the last nine years or so. I enjoy it and it’s easy for me to keep up on all these things. I like to take all that information and bring it to you this way because I know that it’s almost a full-time job. Every single day I’m doing that, I’m researching that. I know many of my readers don’t have the time to do that one.
I call this one the safe and profitable way to invest in a changing market. In this case, the market’s not just the real estate market. The stock market is getting high and it’s starting to go through wild swings. You’ve got interest rates going up because of the fed which is changing mortgage markets, credit cards, student debt loans, and home sales because mortgages are more expensive. It covers a lot of ground. I start examining that and I said, “Here’s what I need to do and what I need to lay out for people as to getting into this market the easiest way and really the safest way, but without giving up the profit margin.” What I’m going to cover is very simple, how to get paid simply finding deals. If you’re new to the note business, this is going to be a particular interest to you because you can earn money in this business without investing a lot of your own capital. You might have to invest a little and I’m talking $500, something like that.
You can go out and find deals for other investors, investors like myself and plenty of other investors in the marketplace who are always looking for deals. If you bring one to us, you can get paid in doing that. The side product there, the benefit that you get out of that is when you’re finding deals for other people, this is typically not a scenario where you go, “I found this. Let me know if it closes and pay me $1,000,” or something like that. If you want to make more money finding deals, you have to stay in the deal and you’ll learn the business while you’re earning money. That’s going to be our first topic.
The second one is how to cash out of your properties and get a lump sum and monthly cashflows. I’m going to talk about properties buying real estate and how do we exit out of those real estates and what’s really overall best for us to do in this marketplace. Rents were going up, rents have leveled off in a lot of places in the US. It’s harder for people to get loans with interest rates going up. There’s been a knee jerk reaction to people buying properties. Some loans are easier to get now than others and it’s definitely having an effect on what you should do as you don’t want to get stuck with a property sitting on the market for a long time. What’s the best way to do that? Can we do that and get a lump sum and have that deal pay us more than one time? Most people’s real estate model, they buy a property, they fix it up, they sell it. They make money one time. What if you got paid over and over again on that same property, both in the form of lump sum and monthly cashflow? We’ll talk about that.
Also, what is the best passive secured investment? Of course, that’s in my opinion of what it is. You’re looking for security in a market like this. I don’t care for your stock market investor reading this and you’re looking for alternatives right now yourself. You’re like, “I’ve made a lot of money in the market over these years, but I certainly don’t want to lose it all.” When you start to see these wild swings and big money moving in and out of the marketplace, no question, it makes investors nervous and they start to look for security. Most stock investors, at least that I’ve known, when they move out of the market, they jump into bonds or they jump into cash or cash-like investments to ride that out. Of course their yields go way down. Right now, CDs at banks broke through the 3% barrier, for example. T-bonds haven’t even got there yet. Two-year Treasury bonds haven’t even gotten to 3% yet but money is starting to go into those areas.
Get Paid Simply By Finding Deals
There are secured notes that you can make 8% to 10% on. Why buy a two-year Treasury note making 2.8% when you can invest it in another type of note and make 8% to 10%? Let’s start with the item on number one here, get paid simply by finding deals. I’m going to start by going through an example everybody on here should be very familiar with. Most of my readers have a real estate background of some kind, the degree of notes training that they’ve had varies, but most everybody that reads this that I run into it training events, my live trainings, a three-day, one-day training, whatever it is, they have some real estate background or another. Let’s start with what you know and then I’ll build upon that.
There’s a concept out there called wholesaling. The definition of wholesaling has changed over the years. The basic definition, at least the one that I grew up in my real estate career over the last twenty-something years was in wholesale. You simply found a deal and then you sold that right to buy that deal to another investor. There was a couple of components that was needed here. You needed a deal finder. If you’re new to the real estate business, an easy way to get into the real estate business is to become a deal finder. Understand how the numbers work, understand how to walk through properties, understand what everything that a real estate investor who has capital does. Maybe you’re in a situation where you don’t have capital, but you can develop a skill and that skill is to identify a deal. That’s the biggest muscle that you can continue to exercise in the real estate and real estate note businesses. It’s the ability to identify a deal. A deal finder simply goes out and follows a trail to good deals. It’s smart if you’re a deal finder to understand who you’re going to be assigning these properties to in the very beginning.
Think about it this way. The other component is if you’re a deal finder, you need somebody to flip that deal to. Who’s that going to be? It’s going to be a real estate investor. You’ve got a real estate investor over here. Wouldn’t it make sense for you before you go find what you think is a deal to find out what our real estate investor is looking for. In my example, it’s a female. She tells you she’s looking for properties in the $100,000 to $130,000 range, she doesn’t want more than $15,000 in rehab, whatever it is. They can give you some insight as to what they are looking for and you go to several of them. Once you’re armed with that knowledge, then you know what types of properties to go out and look for. Remember, as a deal finder, you’re not finding deals for yourself. You are finding them for an end buyer, which is going to be that real estate investor. What you do as a deal finder is you follow leads. That might be maybe going to foreclosure sales, maybe buying HUD properties. Maybe you’re looking for distressed owners, maybe you’re canvassing neighborhoods, whatever methodology you’re using, you’re going out and finding those deals.
If you’re doing it the right way, you found a good deal on the property and you get the right to buy that property. You write a contract on it, subject to further due diligence, subject to your partner’s approval. You have little escape clauses within that contract. Let’s say you go out, you find a house and you get it under contract to buy it for $100,000. I’m not going to muddy this up with here’s what it’s worth and everything else. I’m trying to make this very simple here. You found a good deal. You know it’s a good deal. It’s probably right for a particular investor that you talked with because it seems like it would be good for her. You get that property under contract where you have the right to buy it, but not the obligation. That’s important. You’re almost writing a short-term option on here. It’s not an option contract per se. It’s really a purchase and sale agreement, but you’re putting in there addendums that say subject to further due diligence, subject to my financial partner’s approval. That’s a great one I use all the time because my financial partner can say no and then I’m out of the deal. Remember, we’re dealing with motivated sellers here.
Let’s say you get that contract where you have the right to buy this property for $100,000. Of course you then present that deal to the real estate investor and she’s going to run her own numbers. Maybe her numbers are different there than yours as far as rehab costs, as far as property value, as far as after repair value, all those things. She’s going to review all that information, but you’ve made an offer to her where she can buy it for $110,000. I’m being generous here, but $110,000 for easy math. Let’s say she does all of our due diligence and she agrees it’s worth $110,000 because after she fixes it up, she can sell it for a profit, rent it, whatever she’s going to do with that property. She agrees to pay $110,000 for that deal. The way it’s normally handled is she gives you that finder’s fee. She might pay you ahead of time, probably doesn’t pay until the closing and you would get that $10,000 because you had the right to buy it for $100,000 and she’s buying it that right to buy at $110,000. In that case, you built yourself in a finder’s fee.The easy way to get into the real estate businesses is to become a deal finder. Click To Tweet
Some people call that bird dogging. Some people call that flipping houses. I don’t know. I always taught flipping houses, you buy the house, you fix it up and then you flip it. That’s not what we’re talking about here. We’re talking about wholesaling. All you did was find the deal. You didn’t put a broom on the floor, so to speak. You didn’t do one thing too. You just wrapped up a deal and then sold that deal to somebody else and you made a nice finder’s fee. You’re also learning how to look for deals the right way because eventually you start buying your own. Everybody should understand that. It’s a very simple concept here. Here’s another thing you can do under the real estate umbrella and that is if you’re wholesaling deals. Why don’t you also wholesale notes? It works the same exact way. There are people like myself that want to buy notes. It makes sense for me to build a bird dog network. I did this years ago.
In fact, I wrote my first book back in 1999, Creating Income and Wealth Through Real Estate Contracts. When I wrote that book, we had for two years already built this national network of people who could go out and find note deals for us. We trained them, they went out and they were able to negotiate their own fees. They know they had a buyer who not only was looking to buy as much as we could, but they were trained the right way. It was really a win-win situation. By the way, that is what I am doing again now. This has been basically the untouched part of the note business because people were simply buying from tapes and notes selling companies. It’s time to get back boots on the ground and find these what I call mom and pop type of notes who did seller financing and start work in those. That’s why I’m writing another book. That’s why I have training programs on teaching people how to do this very simple concept.
As a deal finder on the note side here, what are you doing? You’re doing the same thing. You’re following up on leads to find a good note deal to known investors. Maybe you find a note investor, like myself, local real estate club, podcast, whatever it is, expo type events, and that investor says, “Here’s what I’m looking for.” Maybe they’re nonperforming notes, maybe they’re performing notes, maybe sub-performing notes, different yields, different ITVs. Find out, “What are the investors looking for? Let me go out and find these deals.” In this case, you’re not looking for a property, although the property is the collateral. It certainly plays a significant role in this transaction, but you’re really looking for a mortgage holder, a note holder, someone who sold their home with seller financing.
That might be an investor who’s looking to cash out to get some more money, it might be somebody who inherited a house and sold it on terms because that was the only thing that they could do to move the property. It might be a lower-end home where people couldn’t get bank financing. There are a lot of reasons why people will do this. You’re looking for the note holders. What do you do once you find a note holder who’s possibly interested in selling? You get it under contract. We do some due diligence in there. I’m cutting to the chase. You get it under contract.
Let’s say you’re the deal finder. You went to the note investor. She gave me a good idea of what she’s looking for. You went out and found it. You get a contract on that where you have the right to buy that note for $100,000 and what do you do? You get that deal to her, she reviews the information and she agrees to pay $110,000. You’ve just done what? The deal closes, you’ve made a $10,000 finder’s fee. That’s as simple as it can possibly be. I’ve made that simple for you. How this normally really works though is you go out and you find potential sellers. You send that information to a note investor like myself. I come back and give you a purchase offer, probably several purchase offers, one to buy the entire remaining note, one for a partial, another smaller partial perhaps. I’ll give you up to three quotes on one deal. You go back to your client, the potential note seller and offer something less than I’m willing to pay.
Already you build in your own finder’s fee. That’s how this works. These finder fees in a deal like that making $10,000 is really more realistic than making $10,000 on flipping real estate deal because you’re not making that much on flipping real estate deal. The margins are too tight and investors aren’t willing to pay that much on these note deals. That is a very easy fee in that price range. Once again, you’re learning the business as you go along. I wanted to draw that parallel between buying real property in buying notes that are secured by real property. Here are a couple of questions for you to think of.
First of all, when it comes to finding deals, let me ask you this. How many properties do you need to look at to find the right deal? It’s probably not one or two. It’s probably driving out to different properties, walking through different properties, setting appointments to go through properties and you might have to look at five or ten to find the right deal to present to your investor. That can take time. If you’re walking through all these properties and driving out, you have expenses already involved in that business of becoming a deal finder, bird dog, a wholesaler or whatever you choose to call that. Let me follow-up with this. Is it easier to find a motivated property owner or a note owner? Motivated property owners are getting harder and harder to find. Property values have gone up. People are staying in their homes longer. Foreclosures are way down in the marketplace. Short sales are all but gone. It’s harder to find those motivated property owners who are willing to take enough of a discount. What about note owners? Note owners, you can buy the name, address and even phone number of as many note owners as you want to for about $0.20 a name.
Is it easier to find a motivated property seller or a note owner? The answer is a note owner. Will every note owner be interested in selling their note? No, some of them are going to go, “Why would I sell my note? I’m making 9%. It’s secured by a $200,000 property and they owe me $100,000 left on it. If they don’t pay me back, I get the property back,” and they’re right. You will have other note owners who, number one, don’t even know they can sell their note. Number two, they’d go, “If I could sell my note, how much could I sell it for?” It’s much easier to wholesale notes than it is to wholesale properties. You don’t have to go out and look at these properties. You’re looking at the note. Your note investor will take care of looking at the property. That’s why when you’re wholesaling notes, you can do this nationwide.
I mentioned that we built a national bird dog network and that’s what I want to do. If you’re new to this business or if you’re looking for a way to make extra money in your business or add this to your real estate, I want to work with you. Go out and find deals for me. I’ll train you on how to do that. You go out and find the people, I’ll buy them. I don’t care where the property is located. I’ll find out the property condition if the numbers are right, which means it’s also easier for me to make a buying decision than it is if you’re flipping properties, wholesaling properties to real estate investors. I’ve done both. I bought a lot of real estates as well. I’m telling you where we are in the market place and this is it. Here’s another question. Which takes more of your time? Driving around looking at properties or sending mail and taking a few phone calls? It’s pretty obvious on there and I alluded to this.
If you’re wholesaling properties, you need to find and present good deals, which means you better have done your due diligence, taken pictures, walked through the properties, estimated the rehab. Otherwise, why would those real estate investors work with you if you’re just giving them an address essentially and they’ve got to go out and look at this and go, “You didn’t see this. You didn’t see that. You didn’t see the roof. You didn’t see the electrical problem here?” How many more deals are they going to look at from you? Zero. You’re done. You have to go out to these properties. You have to look around. In wholesaling notes, you’re sending direct mail. It’s the best way to do it. By the way, don’t tune out and go, “I’ve got to send out letters.” I, very crystal clear, remember sitting at the kitchen table with my wife and with our one little laser HP printer, printing out letters, folding them up, putting them in the envelopes, licking the envelopes and licking the stamps.The skill to identify a deal is the biggest muscle that you can continue to exercise in real estate. Click To Tweet
That’s what we did twenty-something years ago. We physically had the old assembly line going through and doing that. You don’t have to do that now. You’re buying your lead list, they’re going to email that leads list to you, and you get that to your direct mail company. They do all that stuff. They mail them out. You never see an envelope. You never see a letter. You simply say, “Here are my letters,” put them on here and send them out. It’s very passive. What happens ultimately is you get a phone number in there, maybe you get to point you have a website on there and they call you up. I have people right now that are getting 4% and 5% response rates to direct mail. If you know anything about direct mail, some of you have heard 4% to 5%, you were thinking, “That’s unbelievable. That’s fantastic. Other people are going 4% to 5%. That’s it.”
When it comes to direct mail, regardless of product or service, a 2% response is considered outstanding. 1% is good. 4% and 5% is almost unheard of. I don’t think that’s going to stay that way forever. This market niche in the note business has been widely ignored because people have been buying direct from tapes and notes selling companies, but those are getting harder and harder to find. It’s time to go back out and do it old school with the new twist of not having to lick the envelopes. Outsource all of that stuff. You can set up a Google phone and when that number rings, you know that’s a lead. When somebody takes the energy to pick up the phone and call you, that’s past a cold lead. That is a warm lead. They’re now thinking, “Sell my note? How much can I sell it for?” You’re getting there.
Here’s another question for you and then I’ll move on. Do note investors or property investors have more variables to deal with? The answer is property investors do. Do property investors really have to think in terms of, “What’s this rehab going to cost me?” That’s where they can get burned. You don’t want to make mistakes on that. You have to be very good at what’s the value of this property now, what’s the value after I fix this property up? What’s going to be the cost of my funds? What’s my exit strategy on this? Is this good to rent? Is this something I’m going to be able to sell? If I do have to sell it, what are my days on the market for this deal? There are a lot of variables that come into place here.
Note investors will have an external BPO done, which we can order and get done anywhere in the United States for around $200, $100 even, I should say. We can get those BPOs done with no problem. If I’m buying a performing note from somebody and that the people have been living in the house for two years and they’ve been making payments on time and that thing, the property value is of course always going to be what backs up my notes, but I’m not going to have an internal inspection of all that stuff. I’m buying the cashflow. I have less variable. In fact, it’s about six variables that I deal with as a note investor versus when I’m buying a property. There’s a lot more than six. I’m saying you can wholesale notes a lot quicker, a lot easier and deals will close quicker. We closed the deal on time from when the person sent it to us. It was fifteen days later. It was a done deal.
We got a plaque for that. I’m not saying that happens all the time. It’s usually about 30 days though. If everybody’s got things in order, 30 days, but if we’re out to 45 days in a close and you get cashed out and you’ve learned the business, how many of those deals can you do? How many leads can you buy? As much as you want anywhere in the US and it becomes a numbers game at some point in time. Those looking for that, if you’re interested in a training program on that, go to my website. It’s my name, KevinShortle.com. You’ll see it right on there is a featured product and let’s get trained. Let’s get you out there and start working together. That’s what I’m looking for there. There are other companies that do that as well.
How To Cash Out Of Your Properties
The second thing I said we would cover after getting paid to simply find deals is how to cash out of your properties and get a lump sum and a monthly cashflow. It’s a very important topic. I did a show with an expert in this area. He has done this dozen of times over and over again. It will change your business. The most effective investors in any changing market, which we are in once again, have skills in the real estate side, but also in the real estate finance side. The real estate note business is the real estate finance side. If you haven’t added notes, buying notes, selling notes and creating notes to your real estate investment business, you’re missing out. You’re leaving money on the table. There’s no question about it, period.
We have a simple example. We’ve got a real estate investor and this real estate investor buys a property. I’m cutting right to the chase. They buy a property, it’s a good deal. When you’re buying real estate, you’re always thinking, “How am I getting in? How am I getting out?” Let’s cut to the chase and say when it comes to getting out of the real estate that this real estate investor purchase, we can really break it down to either you’re going to sell it to a consumer now, you fix the property up and you’re going to resell it to a consumer or you’re going to rent it. I know there are other variables and other fine points on that, but I’m trying to keep this very simple for this format and say, “You’re either going to sell it or you’re going to rent it.” Those are approximately the two biggest exits for real estate investors and there are benefits and drawbacks to each one of those.
Some of the benefits in selling to a consumer, you cash out of that deal. You bought the property, you fixed it up. You want to do that expeditiously. You want to get that thing on the market. You want to sell it. You want to have short days on market as you possibly can, sell it to that consumer, they get a bank loan, you get cashed out at the closing and you’re moving on. There’s nothing wrong with that model. I’ve done hundreds of those under that model in Florida here. The drawback is you get paid one time. You get a lump sum, but you get paid one time on that deal. To make more money, what do you have to do? Another one and another one. That’s why I was buying up to 60 houses per year at one point in time. I was buying them, turning them, buying them and turning them.
When you do it that way, you can make really good money doing it, but when the inventory dries up or when you run out of consumers to sell to, that’s when that gets hard. Your days on the market get longer. Every day on the market costs you money out of your pocket. You can always rent the property. Rentals absolutely have been great over the years. Actually you go back 2009 and 2010, so many people lost their home or facing foreclosure. People consolidated, people decided to rent. They couldn’t get a loan to buy homes. Rents have gone up throughout the United States. They’ve leveled off at this point in time in most all areas according to all the studies that I’ve read on that.
We can rent a property and that’s a fine way to build up a portfolio. You’re getting appreciation hopefully in the property. We also know you could lose value on the property, but you’re hopefully getting appreciation on the property. You’re getting tax deductions and you’re getting monthly cashflow. The drawback is a lot of people don’t realize how much it takes to keep that property in shape, how you have to deal with tenants. Even though you have property managers managing your property, they can’t make all of the decisions. They’re going to be calling you. They’d call, they’d say, “The tenants moved out. They broke their lease. They did this, they broke the thing, they damaged the house.” All of a sudden that monthly cashflow that you’re getting is getting eaten up by expenses in both time and money of yours. That’s why a lot of real estate investors get soured on rental properties after a while. They’re tired of the day-to-day grind of having to deal with the property itself. Any damage to the property and the upkeep on the property and also dealing with the tenants that are moving in and out of those properties. The better solution is to add the financing side of real estate to your real estate business. That is to sell that property with seller financing.A deal finder simply goes out and follows a trail to good deals. Click To Tweet
You are the bank. This real estate investor buys this property, they fix it up, they sell it to a consumer because this consumer doesn’t have to go through bank financing. You’ll have a bigger audience in which you can advertise to and there are more potential buyers that can purchase your property. I’m by no means saying the first person who drives up, you sell it. You absolutely qualify them. You want to get as big a down payment as you can. You do want to run their credit and everything else. You do want to see that they have the ability to pay. Don’t get me wrong, but your standards are not going to be the same as bank standards. In fact, you could combine renting and then selling. You could do a lease option and then offer them terms in which they buy the property. That way they take better care of the property under a lease option typically. You don’t have to. You could go right to selling it to a consumer and you can outsource that though. You have a loan origination officer who’s going to go ahead and create the loan. You’re going to get a higher interest rate.
This deal will pay you monthly cashflow, but you’re not a landlord. If you sell it directly to that consumer, they own the property. They’re on the deed, you’re on the note, you’re on the mortgage. You’re acting like the bank. You get paid that money every single month. If something happens with the roof leaking, that’s not on you. Think about it. If you have a loan in your home right now, do you call Bank of America, Wells Fargo or Quicken Loans, “The roof is leaking. Send somebody over?” No. You own the property. It’s the same thing here. You buy the property, fix it up, you sell it to the consumer, you get down payment and the monthly cashflow without all of that liability. Here’s the thing, what if they don’t pay you? What does the bank do if you don’t pay the bank? They’ll take the property back or modify the loan. You’re the bank, so you modify the loan if you need to, you do some work out or if you have to foreclose, you have to foreclose. Maybe get a quitclaim deed. Let them off the hook. They don’t have to go through a foreclosure. They’ll deed the property back to you.
Years ago when I was getting my real estate license, I don’t know how many years ago it was. Our instructor, when he found out what I did in the note business, he goes, “I have the same house I have sold eight times under notes and people on average stay in the house two years, then they go, “We’re moving. Would you let us off of the loan?” He goes, “I’ve done that eight times where people sign the deed right back over, sells the property, gets another down payment and sells it to somebody else.” I’m not saying make that a business strategy and telling you what happened to this individual person here who are teaching people how to get real estate licenses, by the way. The seller financing brings all of the benefits really without any of the bad stuff. The worst that can happen, sure, you’d have to foreclose on a property. Maybe they damaged the property.
If you structured these deals the right way, you’re going to be in good shape. You have that same risk, by the way, if you rent it to someone, don’t you? With seller financing, you get all of the benefits without all of the drawbacks and it’s a great way to go and build a portfolio. Adding notes to your note business here, when you sell it on terms, you’re typically able to sell it at a premium. You’re selling it at the top market because you’re offering financial terms. You get paid over and over again. That one property now is paying you back lump sum, whatever that down payment was and then monthly residual income without you having to do a thing with the property or the person living, a borrower in that property. It’s their home. They have to take care of it, they have to upkeep the insurance. You outsource that. You have a company that’s even collecting the payments, they’re checking to make sure the insurance is paid and property tax is paid. You outsource all that stuff. You get no tenant issues as there isn’t a tenant and we can still get a lump sum. Here’s where some people go, “I get it. I liked the benefits of selling with seller financing, but I put a lot of money into a property. I fix it up. I’ve got to get a lump sum back and I can’t do that if I do it with seller financing.” A lot of these people are put in 3% to 5% down. I get that.
Here’s what they don’t know. Let me run some numbers here with you. Let’s say that you sell a property for $105,000. You bought it for whatever. You fix it up for whatever. You sold it for $105,000. That’s a peak of the market price because you offered it for sale to somebody, they had $5,000 for a down payment. That’s a small down payment, but you took $5,000 down, so now you’re going to create a $100,000 note. That note, the IOU, is going to be secured by a mortgage. It might be a deed of trust, which is a type of mortgage going to be secured by a mortgage. What happens in a mortgage is the person who bought that home from you gave you the down payment and they’re promising to pay you back $100,000 principal, but of course it’s going to be more than that, at an interest rate over a longer period of time, 10 years, 20 years, 15 years or 30 years, whatever you structure that note as. The mortgage says, “If I don’t pay you back according to that note, then you have the right to foreclose.”
The deed of trust says you have the right to sell the property. Either way, there’s a security instrument. You sell the house for $105,000, you took $5,000 down and you create $100,000 note, 8% interest, 240 months, your payments would be $836 per month. You’ll notice I didn’t do that at 30 years. You don’t have to do that 30 years. In fact, I make a better quality note if I shorten the term. Why 8%? Can’t people get lower rates at banks? Sure. If these folks could have gone to a bank to get lower rates, what should they have done? Go to a bank and get lower rates. Maybe they don’t have the proper debt to income ratio. Maybe $5,000 wasn’t enough. Maybe they took some hits on their credit years ago and lost a home or something like that. 8% is fairly common with seller finance notes. It’s going to be higher than bank rates. The payments on this, $100,000, 8%, 240 months is $837 all rounded up. It’s $837 a month. I bet you that same home would rent for more money.
You could go rent it if you want and get more cashflow coming in, but also you have what? Expenses, dealing with tenants and everything else. There’s a tradeoff there. If I’m getting 8%, people don’t care about the 8%. I’m telling you right now, they don’t care about the 8%. What they care about is what is the monthly payment and can we afford it? That’s really the mentality you’re going to run into. Their thought process is, “We can buy a home now. Let’s buy it now. Home values are going up. I don’t care if it’s 8%. We can afford the payment. The payment is cheaper than rent. In a couple of years, we’ll do refinance. Perfect.” That’s what their thought process is here. Once again, you’re saying, “That’s fine, but I need the lump sum. Where do I get a lump sum? $5,000 is not enough for me to get back and do some more properties. I need to get more of that property. I bought the property, I fixed it up. I need to get more than $5,000 out.” How much more do you need out? In my example, I said $20,000. You get $5,000 down. What if you needed another $20,000? That note that you created is an asset. Why don’t you sell a portion of that note to another investor?
You can actually do that right at the closing table. It’s called table funding. You could have this all structured ahead of time and you already have an investor who’s going to make $20,000 as soon as the ink dries on that new note that you created at the closing. Now, you’re walking away at the closing at $25,000. You might have two depending upon the note and the property. You might have to season the note a couple of months. Maybe you keep it a couple of months and then you sell the note, but you have options on doing this. You take that note and you can take a simple financial calculator and run the numbers. I’ve already done that ahead of time here and I figured, “We want $20,000 or that’s what we need from this note.” I put into the calculator how many payments would I need to sell to another investor if they’re going to get an 8% yield? I kept it at 8%. How many payments would I have to sell? The answer is 26 payments. I think I wrote an 8% yield. Twenty-six payments are all I would have to sell. It’s a couple of years’ worth. What happens? I bought the property, I fixed it up, I sold it, I got $5,000 in the down payment. I got another $20,000 and I won’t receive another dime for the next 26 months. Do you know what happens on month 27? I start getting those payments back of $837 a month.
I carved off 26 payments of the 240. The investor who paid the $20,000 gets their 26 payments and I get all the remaining payments. Some of you might be thinking a little bit ahead, “That’s the case in 26 months. Could I sell another two years of payments?” Sure. Another five years or payments? Seven? Ten? Sure. You can do all of that or keep the monthly cashflow. It’s totally up to you. There’s more flexibility. Now this deal is paying you multiple times and you also have multiple outs, all depending upon the circumstances at the time. Here’s an advanced one for you. What if you wanted lump sum and monthly cashflow? Instead of waiting that two years where you sold the note and you’re like, “I’m not getting any payments for two years,” you want to get a lump sum and monthly cashflow. Here’s how I would structure that deal.
Using the same numbers here, sold the house for $105,000, I’ve got $5,000 down, I need to create $100,000 note. In this case, if I want lump sum and monthly cashflow, I’m going to create two notes, not one. I’ll create a $70,000 first note and a $30,000 second note. These numbers, I could move around and adjust. I’m trying to keep this simple for you. I could keep let’s say the first note and sell the second. Maybe I sell that second note to another investor for $20,000. I could also invert that, by the way. I could sell a portion of the first note and keep the back note. I could sell the entire first note and keep the second position note. There are a lot of different ways that I could structure this depending upon the deal and everything else. If I did it this way, I kept the first note, I sold a second note to another investor for $20,000, so I get my lump sum there and I’m getting monthly cashflow on the first position note. There are lots of different ways to structure these deals.When somebody takes the energy to pick up the phone and call you, that is a warm lead. Click To Tweet
The next thing I said that we would cover is the best passive secured investment now. The Fed has increased rates. The lead economist for the National Association of Realtors did a presentation at their event in Boston. The Federal Reserve rate has been going up, and when the fed rate goes up, that means other interest rates are going to follow suit because money has now become more expensive for banks. What happens is investors of all kinds are drawn into safety once again. They’re looking at cash, they’re looking at bonds, they’re looking at notes. Treasury bonds, CDs, cash and cash-like investments, the short-term treasury notes, long-term treasury bonds. They’re trading off the big potential gains in the stock market because historically, when rates go up, stocks go down. You’ve seen what’s happened with the fed. I was watching that. Also, there are these wild swings in the stock market and a lot of investors are starting to retreat. Let’s take some of those profits, at least in some cases, all of those profits, and put it somewhere safe. The problem is when you’re buying cash or you’re keeping a cash position or a savings account or a CD or a bond, treasury notes, you’re only making 3% on your money.
Best Passive Secured Investments Today
You’re barely keeping up with inflation, if you will. There is one secured note that is paying 8% to 10%. That’s where you want to be. As I mentioned from the National Association of Realtors, I did not put this headline, I cut and paste from Realtor.org, and it says, “The Fed, Have They Gone Crazy?” I wasn’t there so I don’t know exactly what he said. The Federal funds rate has gone from zero to upwards now of over 2%. You can see how long all the way through 2011, all the way through 2015, 0% federal funds rate. It ticked up, and it’s drastically now been increased in since 2017. That is causing some turmoil in the marketplace. I’ve been tracking this for a year. In fact, this article goes back February 1st, 2018 from CNBC. They’re already this year talking about what’s the most compelling cases right now for the market? Cash. Why? Because of fear. Rising interest rates are going to do this to the market and go into this to the bond market.
There is a lot of fear in the marketplace already talking about cash, then they snuck in at the bottom of the article. More and more bond investors, bond gurus they call them in the article, they’re talking about bonds. If interest rates are going up, that means that the coupon rate on bonds is going to go up. You hit the safety of that with the increasing coupon rate, but they’re not even at 3% yet. Midway through the year, July, 2018, Forbes had this article. The headline, Why Hold Bonds in the Current Market? It comes down to help manage risk. There’s fear in the marketplace. People want to avoid losing what they’ve gained. They want to go to safety. If they can make 3% to do it, they’re willing to trade safety and low yields but you don’t have to.
Here’s another one. October 30th, 2018, this one, MarketWatch from the Wall Street Journal, Cash is King Again, But Is That Also A Sign That Another Recession Is Looming? They talk about cash. Cash is back because of risks. People are worried about the risks in the marketplace. They want to invest without having to worry about losing everything they have built up. The sub-headline says, “Interest Rates on Two-Year Certificates of Deposits Have Cracked 3%.” You can invest in cash or cash-like investments and make 3%. Why do that when there are secured notes that are paying much higher returns? There are similarities between all of these instruments. When you look at cash, take out a dollar bill right now, whatever you have. I have a $100 here. You’ll notice on there that cash is really in the USA note. It says it right on it, Federal Reserve note. A $100 and all dollar bills are notes.
What does that mean? That means that the Federal Reserve note is backed by the full faith and credit of the United States. In fact, they even put on there that this note is legal tender for all debts, public and private. It’s not backed by gold anymore. It’s backed by the full faith and credit of the US government. We all choose to honor the fact that that is worth $100 and that’s how our system works there. Even our cash money is a note. Take another step. When you write a check to somebody, isn’t that a note? Sure. You’re promising to pay. You’re signing a note is what you’re doing. They’re going to take that note, that checks to the bank and cashes it, and they’re hoping what? The money’s there. If somebody writes you a check and you take it to the bank and they say, “Insufficient Funds,” you got yourself a nonperforming note, don’t you? It’s exactly how it works. Even a check is a note.
Cash is a form of a note. What about bonds? I got a picture of a bond. You won’t find those interest rate. This is a bond going back to set in 1979 and this is a coupon bond. They’re paying 10.25% interest. You’re not going to see that now. You’ll be lucky to get 2.5%. On this $10,000 bond, what has this investor done? The investor essentially lent money to the US government. They give money to the US government. In return, they get a piece of paper called a bond. In this case, a coupon bond. The coupon bond says that the US agrees to pay this money back plus interest on specific dates. This one has a couple of different payables within it. That’s what you’ve done. You’ve lent money. You got yourself a debt instrument is what you did there.
You now are going to get paid back on this bond when the maturity dates have been reached. What’s it backed by though? The collateral, if you will, is the full faith and credit of the United States. That’s what you’re buying, their promise to pay you back. What about a note? Here’s an example of a $5,000 treasury note. The Treasury note being very similar, you lend money to the government, they agree to pay you back with interest. I get specific dates. This note you’ll see on the bottom has coupons that you tear off and you can cash in February 15th, 1986. You got one in 1985, August 15th, 1985 and ‘86. What are the ingredients here? They’ve got a specific amount of money. In this case, $5,000. The interest rate is there, the dates of the payback. It’s all there.
What’s it backed by though? What’s the collateral here? The full faith and credit of the US government. The government’s promise to pay it back to you. They’d been good about paying that back and that’s why the world invests in these. This is considered a very safe investment, even though it’s not backed by a physical asset, gold or anything like that. It’s backed by our government, but our government doesn’t want to and has defaulted on these. That’s where some other governments throughout the world have defaulted on bond holders and that causes some issues.
Here’s the thing. I mentioned to you there is a type of secured note that’s paying 8% to 10%. Why make 2% to 3% on these when you can make 8% to 10%, but what type of note is that? It’s a mortgage note. A mortgage note does all the same things. It’s the same agreement. This mortgage note, I typed in there $250,000. It will be dated for the value received. There’s a promise to pay. There’s an interest rate. There’s the day in which the payments are made. All of the same ingredients that you saw on the bonds, on the notes their specific amounts. Here’s what you’re borrowing, here’s how you’re going to pay it back. The difference here with these mortgage notes is instead of the bonds in the notes that you saw that pay you back in ten or fifteen years, on this, you get paid every month. Every single month for maybe 30 years. Long-term note and the interest rate are going to be much higher than what you see on those. Of course, if you bought this note at a discount, maybe this is a $300,000 property and you paid $150,000 for this note. I don’t care what the interest rate on that note is.
Let me tell you something. If I paid $150,000 for a $250,000 note and I bought all the remaining payments, my return is going to be much higher than what the interest rate is written on this note because I paid less for it. I paid less for it, so my yield is going to go up. I know I threw $150,000 and it would be probably way too little for this particular note, but you get my point. I want to make a good correlation where you can see the point here. It’s exaggerated a little bit here, the example. We’ve got all the same ingredients of note here, but what’s the collateral? Here’s a big difference. The collateral is not the full faith and credit of the United States. In this case, it’s the property itself. If they don’t pay you on this note, you get the property.The seller financing brings all of the benefits without any of the bad stuff. Click To Tweet
If the house is worth $300,000, you bought this note, and who knows, maybe it’s a nonperforming note and then my numbers would make total sense, then you’re buying this a note for $150,000. If they don’t start paying again or I have to foreclose, I’m getting a $300,000 house for $150,000. I can live with that. All of these real estate notes are backed by a physical asset in the form of real property. Let me give you an example of this from one of my students here. This is probably sold in 2015 with seller financing. My student had nothing to do with this, this in fact was an REO company that bought this property bulk REO from Fannie Mae as a part of probably a portfolio of 8,000 homes. They bought this one. They fixed it up and they sold it to somebody with seller financing. Why was it seller financing? Because it’s only a $50,000 house.
Banks can’t make enough money because of Dodd-Frank on a $50,000 house. It’s very difficult to sell in that lower price band. They had to sell it with seller financing and you can see they’d sold it in 2015, it was $750 down, and the note was 5346. This REO company wanted to cash out of the note, so they put the note for sale. The property, BPO, Broker’s Price Opinion, is $50,000. The people living in the property, the homeowners, had made 43 successful payments. They’ve been in there about three and a half years, something like that. That’s what we call well-seasoned note. They’ve got a good track record of the ability to make that payment on this three-bedroom, one bath house.
When our student bought the note, the principal balance had gone from $53,000 and changed down to $52,000. Does that make sense after three and a half years? These loans are amortized. Most of this monthly payment, which is $504 a month by the way, is going towards interest. There is very little principle in those first two and a half years. The principal balance of the note, when the student bought it was $52,665. There were 209 payments remaining and this note was originated at 9.99%. The original loan three and a half years ago was already written at 9.999%. They only put $750 down. They didn’t have the best credit in the world, but now they’ve got a good track record. They’ve been making those payments for over three years and they bought this note, believe it or not, for only $23,400. Going back to my previous point, if I’m investing $23,400 and I’m getting the same payment, $504 a month for 209 months, my annual yield is going to be much higher than 9.99%. 9.99% is the coupon rate, but I’m paying less for it. I’m buying that at a discount, so my yield goes up.
The other thing we look at before yield is a risk. Risk in this business, we look at the investment to value ratio. What’s our investment, in this case $23,400, as it relates to the value divided by the value of the property. The property is our collateral, so the property is worth $50,000. You take your $23,400 divided by $50,000 and you’re going to see you get a 47% investment to value ratio. That’s a safe investment. I’m in this deal for less than half of what the property is worth, so if I have to take it back, I’m still making money. My yield by investing $23,400 and getting $504 per month is an annualized yield of 25%. I am in no way telling you every note that you buy is 25% you’re going to be making. If it was 8%, would you be happy? If it was 10%, would you be happy in this marketplace? I think you would. Where else can you get 8% to 10% and it’s secured by something worth more money than you have in the whole deal? I don’t think you can.
That’s why I’m saying this is the perfect place to be for passive investors. If you buy this type of notes, you start getting paid next month. If you buy it and close it this month, you’re getting paid next month. It’s very simple. You have servicing companies collect the payment. If it’s escrowed, they’ll make sure the taxes and insurance are being paid. If it’s not escrowed, they’ll still make sure the property taxes and insurance are being paid or they’ll let you know that they’re not in. Here’s the thing, if you wanted to cash out of some or all of this note, could you go back and sell a portion, a partial of this note for a lump sum? You’ve got 209 payments. You could sell 100 payments. You can go 50 payments. You sell the next five years’ worth of payments. Whatever you want it to do, if that’s what you chose to do. In fact, you could probably sell enough payments at this price where you could sell enough note of the note, get all your money back out of this deal so you own the note for free and then you probably have to wait. That would come out to four or five years or whatever it is to get your capital back on your payments. You already got all your capital back.
This investment for passive investors has the safety of cash-like positions of bonds, of notes, but it’s secured by a physical asset. If you buy right on these things, this monthly cashflow comes in. Remember, it’s mailbox money at this point in time. Your servicing company’s collecting it, accounting for everything. Letting you know if anything is going wrong. You’re not going to be getting calls from tenants because they’re not tenants. They own the property. These people had been there for three and a half years making payments. If anything, you’ll probably on this one get a phone call in about five years saying they’re going to pay off the whole note. Where do you think that principal is at that point in time? You’re doing extremely well in these types of investments.
If you want to learn more about this, if you haven’t been my website, please take a look at that. It’s KevinShortle.com. If you’re interested in our first topic, which was wholesaling or brokering notes, I have a program on there where you work with my team, the note team. You can see all the information there. I’ve got videos on this. I’ve got the email support. I even give you a bonus coupon to help pay for the program. If you’re interested in that, go to the website. If you want to go directly to the product page where wholesaling is, it’s KevinShortle.com/product-page. You can see all the information there. If you go to the regular website, you’ll see it about halfway down. If you’re interested in what I call our perfect note monthly subscription, which is $200 a month, if you’re a passive investor and you want me to find notes that fit what you’re looking for, my team and I will do that. You tell us what you’re looking for. There will be a page that you fill out to tell us what your ITVs are, what your risk tolerance is, what your price range is.
Me and my team, we find the notes for you. We send you notes that fit what you’re looking for. We do a lot of the due diligence on these as well. You get a full spreadsheet, you’ll have all kinds of information that we put on the spreadsheets. All you have to do is make a final buying decision. That’s what holds passive investors back from buying these performing notes. They don’t know how to evaluate them. They don’t know how to do all the due diligence. They would really rather have somebody say, “Is this a good deal? Should I buy this one and why?” That’s what we put in our perfect note monthly subscription, is where we’re looking at assets here every single day.
Go to the website and go down to product page and you’ll see Perfect Notes Subscription as well. That I do have to limit by the way. You’ll see that on the website because I can’t give that top-quality service to everybody. It’s a very limited program that I’ll be working with investors for that one. We’ve got trainings coming up. If you haven’t subscribed to my website, to my mailing list, you may want to do that as well. I’ll let you know where I’m doing live events. I do live three-day training, really getting into all the details of this. I don’t think anything will ever replace live training. I love doing webinars, but there’s something about a live training where you have that human contact, that interaction, the question. Maybe you want to come out and see one of those as well. Thank you.
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