Creating Cash Flow Through Rentals Without Owning the Rentals

0:00So so getting to the note investing can you kind of just explain what that means to buy a bank originated note and how does that work yeah absolutely so let me put it this way a lot of people like to invest in real estate and there's all these different types of assets right you have single family houses commercial property multifam maybe have a vacation property you're doing some shortterm rentals right and mostly all of those properties are purchased with some kind of financing some kind of Leverage to make the cash flow work well and to get into a property with

0:48A low down payment instead of paying all cash for it but what if instead we were to talk about investing in the paper and inv invting in those notes and mortgages associated with all those different properties now Kirby this is a really interesting part of the real estate business and from speaking with hundreds and hundreds and hundreds of investors over the years Real Estate Investors they don't pay any attention to most people when they think of a note in a mortgage they think of being the borrower and not from the perspective as being the lender and when you get involved in node investing what this does is it allows you to step across the aisle and become the bank and

1:37Now you transition from being the one making the monthly payments to being the one receiving those monthly payments and so doing this it's it's a great way to increase the predictability of your cash flow it's consistent it's predictable and and the best part of it is that as an investor you're in a secured position because you have the real estate backing your investment the same protection that that Banks get when they lend on money on a property but the banks have already originated the loan they've underwritten the borrower they've done all that and so if you're buying a loan on the secondary Market you're

2:26Able to step right into the shoes of the bank you are having a contract assigned to you which many Real Estate Investors you'll recognize that terminology what that means is you are stepping into the shoes of the person before you that entered into that contract and it's assigned to you and so now you have all the rights and remedies that are outlined in those legal documents and so this is what known investing is all about that's great that's a good explation and so just to give a tangible example say somebody's buying a rental property for 150 and they got a 30-year fixed loan for for $100,000 from a bank so then you would basically

3:15Approach that bank and you would purchase that loan for whatever the balance is of that loan is that is that how it would work not necessarily let's back up a little bit because I want to want to give an example yeah that's going to be relevant to 99.5% of you listeners out there great I'm sure that just about everyone has had this experience think about this you've gone purchased let's say either you purchased a property or refinanced a property you go you go to closing you sign all the loan documents and all of that and then you walk walk out of closing and you're either going to have a

4:04Whole set of keys from a property you just bought or a check from the title company as part of the refinance and you start start making those monthly payments well wouldn't you know it within one to six months let's say after you've closed on that loan you get this letter from the bank that says Dear Mr Mrs homeowner please be advised your loan has been sold to another lender and starting next month please make your payments to the new lender here's their address here's their contact info and by the way don't worry none of the terms of your loan will change same interest rate

4:52Same payment all of that is the same however please begin making your payments to the new lender at as of the following month and so what just happened there that loan got sold on the secondary Market to another investor maybe it was sold and packaged up into a Wall Street security Wall Street instrument this happens all the time and for the borrower everything's the same but for the investor now they've acquired an asset and they're going to be receiving those monthly payments and what's very customary in the secondary Market is that the loan was purchased for less than

5:41The amount owed on the debt there's that's the discount and and that's how loans loans are traded and so this this happens every single day and so for us as investors we're able to go out to the second AR Market as well and buy loans you can buy loans from Individual investors from note funds that exist from hedge funds there's all these different entities that are in the business of buying and selling notes and holding notes and so you can get involved in transactions that way got it got it that's that's interesting no and I appreciate that explanation so I guess what are the types of notes that

6:29That you're interested in like why why did you find that this would be a more profitable or more stable route than just owning the the rental properties outright yeah that that's a great question so for me the first part of your question we like Residential Mortgage notes those are the most common as you can imagine there are notes on Commercial properties Residential Properties there's even notes on there's Auto debt there are is Marine debt notes that are on Yachts or airplanes all all kinds of construction construction equipment is another one that's popular so there's all these different types of notes that

7:18You can buy they may be secured by an asset or not but we focus on Residential Mortgage notes because they're the most common they're the most common notes they're the most available to buy just because of the sheer numbers because these are houses all across America on homes just like the ones that you and I live in and so they they're all sizes from under $50,000 loan balance or you can get into the jumbo loan realm where it's millions and and more on houses and so and and everything be between so th those are the most the most common and that's what that's what we focus on in our business okay

8:07Nice and so that but I I have colleagues that you know they focus on on Commercial loans or business purpose loans if there there are loans for hard money lending that loans made to Real Estate Investors are doing Fix and Flip properties they're even note funds that that's all that they do that's a specialty area they they deal in notes that are foreign investors those are your dscr that service coverage ratio loans or they might be hard money loans where it's a shortterm six months or 12 months loans yeah so you you can whatever your appetite is you can really pursue any of those types yeah and that's

8:56That's awesome that that's available out there I guess I'm trying to wrap my head around like what is the how do you make your money on it like what's what's considered a good note what's the what's the advantage that that you get from investing in notes like how how do you if if you see a $100,000 note what do you buy it for and how do you evaluate like what a good a good note to to own is yeah that's that's a great question and th this is Kirby this is a pretty involved question you can get really deep I I cover a lot of this in my in my book on Note investing I have several chapters on evaluating notes and awesome and how to how to do the analytics on it but

9:44Let me just sum this up quickly that notes are bought at a discount and if we take an example of $100,000 note that is at 6% interest rate well that might be sold at a discount depending on any number of factors that note might be sold for 95,000 or it might be sold for 990,000 or maybe 80,000 and for the investor buying that that drives their rate of return up higher so while the borrower is paying their 6% interest rate the investor due to the fact that they bought it at a discount they might be receiving a 78 eight n or 10% rate of return on that

10:33Loan because of the discount and how does the discount vary you may you may be asking it depends on the risk characteristics of the note in general like any investment if you're willing to take on more risk you can earn a higher rate of return if you want low risk super safe then you're going to receive a lower rate return got it okay okay and the risk is that basically they default but if they do that you have the right to go through a foreclosure process right like just like a bank would yeah those those are terms that are all outlined in in the loan documents in the mortgage the mortgage document itself but the as the lender you

11:22Are on title with the loan documents recorded in the county Courthouse where the property is so that property cannot be conveyed with clear title to another person without having addressed all of those leans and so whether the property is pursued in in foreclosure or not there's still a valid lean there secured against that property got it and that's that's the security but in reality that's not something that happens very often because most of the time some kind of an agreement is reached when whenever there's a default situation

12:12Between the lender and the borrower the majority of cases an agreement is reached because a as a lender the last thing the lender wants is to take a property and become the owner of it although they can it's not what they want it's not part of their business model yeah and so the best outcome for everyone is reaching an agreement and getting the loan back on track again