Be The Bank S4 Ep22 - What Should I Invest In First?
On episode 22 of season 4, Justin Bogard and Richard Thornton discuss the thought process of a first time investor.
Key Takeaways:
Resources and links discussed
About the Host
Justin Bogard – Note Investor specializing in performing Residential Real Estate Debt. He finds deals and acquires them for his own portfolio as well as educates investors while walking them through the process of owning a Real Estate Note!
Connect with the Host:
Be The Bank S4 Ep22 - What Should I Invest In First?
On episode 22 of season 4, Justin Bogard and Richard Thornton discuss the thought process of a first time investor.
Key Takeaways:
Resources and links discussed
About the Host
Justin Bogard – Note Investor specializing in performing Residential Real Estate Debt. He finds deals and acquires them for his own portfolio as well as educates investors while walking them through the process of owning a Real Estate Note!
Connect with the Host:
Interested in real estate. How about wealth? Well, they go hand in hand. And here you'll learn all about it. About it. Welcome to Be The Bank, a podcast where we discuss and debate the topics centered around real estate investing. Your host just at Bogart share's insights into investing in real estate to create real wealth and passive income for you and your family. He'll share stories of real estate investments done right, walk you through the process of owning a real estate note, and most importantly, educate you so you can be the bank, your bank. This is be the bank brought to you by Bright Path Notes. Now, here's your host just in Bogart.
Justin Bogard:Hello, it is episode number 22. I'm your host Justin Bogart on the Be the Bank podcast sponsored by Bright Path Notes. Today we're gonna be talking about what most investors want to get into real estate notes and kind of the path that they should follow or what they think they should go down and what really reality is. So stay tuned. Hey, Richard, how's it going?
Richard Thornton:Pretty good, Justin, yourself?
Justin Bogard:I am doing pretty well. It is a warm and cool on some days here in Indianapolis. Today happens to be a cooler, a cooler day. Excuse me. Cool. Cooler day. Uh, so what's the weather like out where you're
Richard Thornton:At? Fall is a, is is upon us. It's, uh, it's mild by your standards, but you know, we've got nights that are in the, uh, mid forties now, and it's probably about 60 degrees outside right now, but sunny and pleasant,
Justin Bogard:I decided to tough it out last night, Richard. It was, um, when I went to bed, I think it was around 50 or 52, so not really that, that super cold outside. And I said, You know what? I'm not gonna turn the heat on. I'm gonna see what happens. Cause it's gonna get down to 34 or 33 in the morning. So I didn't have the girls with me. And I was thinking, Okay, you, let's just see what happens. And I woke up in the morning and<laugh> what the thermostat said, 40 degrees. And I was going, Whoa, that's risk baby<laugh>. Yeah.
Richard Thornton:Hopefully you were, uh, you were tucked in, uh, tightly there. I'm going to,
Justin Bogard:I did, I put on three blankets last night. I just wanted to see what it was like to, you know, see, see, you know, what the temperature was gonna be like in the morning. So I, I toughed it out and, and did it. I don't think I'll do that again. But, uh, now, you
Richard Thornton:Know, That's right.
Justin Bogard:<laugh>,<laugh> now. I know.
Richard Thornton:It's kinda like hitting your thumb with a hammer. You, you've done it once and I know what it's like and you know, you just don't need to do
Justin Bogard:It again. Yeah. At that temperature, if I would've hit my thumb with a hammer, it probably would've splattered all over the place. Mm-hmm.<affirmative>. Mm-hmm.<affirmative>. So why is it every time we always just bring up the weather? Like our opening remarks are just about the weather, you know, is that's just, that's just a common thing to go to,
Richard Thornton:You know, Small minds think alike.
Justin Bogard:Small minds think alike. That's right. Speaking of small minds, I'm just kidding. Mm-hmm.<affirmative>. So Richard, I just went to Coeur d'Alene over the weekend to a real estate summit that our friends Larry Marishka put on out there in Coeur d'Alene, Idaho. And it was pretty nice. I got to travel out there. It was the first time I ever been to Coeur d'Alene.
Richard Thornton:It's a nice
Justin Bogard:Area. So it was a very nice area, except the first day I got there, it was very cloudy, gloomy, and rainy. So, and cold. So I really didn't get to see a whole lot, uh, the beautifulness, if that's, if you can say that. Mm-hmm.<affirmative>. But before I left on Sunday, it was, it was cool in the morning, but it was, it wasn't as overcast, it was partly cloudy. So I got to see, uh, a little bit of Coeur d'Alene and it is, it is amazing. So those of you that have been there probably know what I'm talking about if you haven't been there. It is a very beautiful place in Idaho.
Richard Thornton:Yeah. Cute little downtown. Uh, yes. Uh, brick buildings and things like that. And there's a,
Justin Bogard:Yeah, there's a diner that Larry took me to and it was on one of those, uh, HG TV shows for like the di uh, I don't even know what it's called, DS and Diners or something like that. Yeah, yeah. But one of those
Richard Thornton:Guy Ferrell or whatever
Justin Bogard:He says Yeah, yeah. Guy Fi. Yeah. I think he was the one that that went there. And it was, it was on, it was an episode on one the show. So that was kind of cool. So good. But, so I went to this real estate conference and I was lucky enough I got to speak at this one. And I talked about how to create highly marketable seller finance notes. There was another person there that talked about some seller finance notes and there was an attorney there, uh, Jeff Watson. And there was also, uh, a lot of, uh, multi-family investor, uh, speakers there and some other, other speakers just in general real estate, cuz this is the first time they had kind of a real estate event in this area for a very long time. I don't know if they said exactly when the last time it was, but it was a very long time. So people from Seattle, from Spokane, from Coeur d'Alene, north of Coeur d'Alene, a little bit south of Coeur d'Alene, uh, people from Arizona kind of visited as well. It was a nice event, but what I took from it was that a lot of people like the idea of seller financing mm-hmm.<affirmative>. Um, and they're starting to understand conceptually that that is an idea that they could sell their investment property on seller financing and get terms and be the bank on it. Mm-hmm.<affirmative> and it's all fine and great. And some people are just actually interested in just buying notes as well. And so, one of the things that I think you and I kind of talk about as a side conversation, never really bring it to a a public opinion or public eye, is a lot of people are kind of confused as to what they should really do first. And of course there's really no wrong answer. It's your money, you do what you want. But if I were in their shoes and I had to start all over again, I kind of, I kind of tell them like, Okay, in my experience, this is what I would've done first because it kind of would've eased me in the door, or I wouldn't have been thrown into the fire so quickly. I would, I would know what to do. Right. So Richard, I, I had these conversations with people and they understand that they could buy these performing loans and these non-performing loans. And kind of the first thing I say, Well, hey, you know, what's your experience in real estate? And most of'em either say, Yeah, I've flipped a couple houses, or I have a couple of rentals, or, you know, I'm a realtor so I understand certain sides, you know, of real estate business. And then so after I kind of interview them and, and get a history of what they've been through, I kind of be like, Okay, I think you can handle this part of it. And, and what I mean by this part of it, Richard, is that we have what's called a hypothecation mm-hmm.<affirmative>. We have what's called a partial mm-hmm.<affirmative>. And then we have what's called a full purchase,
Richard Thornton:A whole note
Justin Bogard:Mm-hmm.<affirmative>. And so I have these three buckets, if you will, that people can kind of fall into. And depending on how that interview goes, I kind of know what bucket they should really be in. And of course they're obviously, they're, they're able to fall or go within whatever bucket they want, but it's, it's in their highest and best interest to, to ease into this type of investing. Um, there is the exception of Richard, where I find some of these fix and flippers that have done probably, you know, 25, 30 or so deals. I don't mind them jumping in, uh, feet first into a, you know, buying a full loan and being able to comprehend and understand that. I definitely don't mind that at all. But sometimes these folks get into real estate from a different type of real estate. And Richard, would you agree with me? It's a little bit different.
Richard Thornton:Yeah. It's, it's different. There are different pitfalls. Uh, even though, uh, owning a note, even if you own the whole note, can be quite a bit easier than being a landlord. Yeah. Uh, I just, I have to smile sometimes because I've got one particular investor who's, uh, illustrative of this and that he wanted to hire yield, so he wanted to buy a whole note. Um, and he did that and he was cruising just fine. And then he found out that he had to pay some taxes and he had to do the this and do that. And he kept coming back to me and basically crying to me and saying, Well, you know, I don't, I don't wanna have to do this, I don't wanna have to do that. And I said, You bought the whole note. You accepted all that responsibility. I told you about that up front. Mm-hmm.<affirmative> you, um, you know, you need to know that. So if you're not willing to or don't know how to do all those things up front, I think the, the slow, um, partial or hypothesis, or sorry, hypothecation is a little bit better way to start.
Justin Bogard:Yeah. It's, um, people get a little bit gung-ho. They, they wanna go after it. They see, you know, some sweeter returns that they could make by owning the full note, but sometimes that comes at a cost and that cost can be time and education. And unfortunately, sometimes you gotta learn the hard way. I jumped into things a little too quickly. Um, I did buy a non-performing and a performing loan when I first got into the business. Um, not that I couldn't handle it, but I think I learned a lot of lessons to where if I would've just start off on a performing loan, it kind of eased my way into it and understood just the process of walking through it. It's one thing to read a book, Richard, Right. And get the, um, the hypothetical of how something works. It's another thing to do something when you're actually executing it and doing it as well.
Richard Thornton:Yeah. I mean, you can look at some of the basics, what, you know, what's the difference between a deed of trust and a trust deed and a contract for deed and a land contract. I mean, those all have very different ramifications in terms of the type of ownership and you need to know about those before you buy one, um, or several.
Justin Bogard:Right. So Richard, there's also another option that we didn't talk about, but there is a fund option as well mm-hmm.<affirmative>. And so sometimes people are educating themselves at the same time they would like to make money. Right. And so it's a way for them to make money and be the bank and also invest into a fund. And that could be just a traditional real estate fund, what they call a reit. It could be a specific debt fund, like a note investing fund mm-hmm.<affirmative> or, or what have you.
Richard Thornton:That's right. It can be, um, any type of, I mean obviously we're setting up a fund right now that's going to be performing and non-performing notes. Um, one of the nice things about investing as a fund is if you don't have a whole lot of money, if you have just say 20,$25,000, it's a good way for you to get in and sort of maximize your yield, uh, on that. Um, as you well know, one of the problems with investing in a smaller note is that by the time you pay the servicing fees and all that, um, a lot of your yield can be eaten
Justin Bogard:Up. Yeah.
Richard Thornton:And very true. If you invest in a fund, you avoid all that.
Justin Bogard:Right. And then the time horizon is a lot shorter with a fund as well, because you're not, you
Richard Thornton:Can then you can jump out.
Justin Bogard:You're not in it for 20 some years if you, if you don't want to be, if you are just like, Okay, I need a couple of years to build up my retirement account a little bit more, so I'm just gonna put this money in there, I'm gonna grow it at a rate, I'm gonna get some education, I'm gonna start adding more contributions to my retirement. And then when that, you know, 24 month time horizon comes around, Hey, guess what? I can take that money out and I can go do something else with it.
Richard Thornton:Right. Right. And you, if you buy, especially if you buy a partial, um, you might be able to do that with a hypothecation, but certainly not with a whole. Exactly. You don't have, you don't have that liquidity.
Justin Bogard:So that's good. Let's talk about that for a minute. So we got the fund and some funds are, are, you know, pretty quick, let's say within 12 months they can put their money in and out. Some funds are a little bit longer, 2, 3, 4, 5 years mm-hmm.<affirmative>. Um, and so the hypothecation is, well you brought that up. So what's, I'll try, do I best to quickly define a hypothecation? It's, it sounds complicated when you talk about it, but when you see it visually on the screen in front of you, kind of how it works, it makes, it makes more sense. But if you imagine Richard and listening audience here, if you had a rental and you had a mortgage on that rental, a hypothecation really is no different than that except your rental is really another note. So what I mean, Richard, is that, um, I have this, uh, house that I, I'm sorry, I have this note on this property and then I wanna borrow money from you Richard. Right? And I say, Richard, if I can borrow X amount of dollars from you, I'm going to pledge to you this note that I have. So it's like getting an a loan against your loan, if you will. And this hypothecation is great because you can make terms to favor your investor, meaning you Richard, in this case, to where it can only be a couple of years. Maybe it's four years and maybe it's a certain percentage rate, maybe it's an Amateurize loan that has a balloon payment at the end. So it's really great, it's really low risk that investor and they're not involved in the day to day operations because I'm Richard's borrower in this scenario. And Richard doesn't have to worry about anything else. He doesn't really have to know anything else. He's just lending money. He had set in a sense, he's just a, just a lender. He's not especially lender.
Richard Thornton:So I'm, I'm lending you, uh, the money for you to buy, um, all or a portion of that note and you're paying me back for that and I get the house as collateral, Right.
Justin Bogard:Ultimately, Yeah. Ultimately that house is, you're gonna be your collateral. So if I default on you Yeah. You take over what I owned, which is that note. So that note could be something that I already have in my portfolio mm-hmm.<affirmative> or it could be something that I'm going to get into my portfolio. So it can be both ways, right?
Richard Thornton:So that's the advantage to me is that I get to learn a little bit about it, I get a nice yield, um, and it is a more liquid investment
Justin Bogard:And it's low risk. It's one of the lowest risk investments out there. Cause it's, it's a one to one investment, right? In a fund, you're investing in an entity that happens to invest in a lot of different assets. Right. You know, it's, it's a one to one, right? Richard, you got one investment and you got one lender. Right?
Richard Thornton:And it's not that we don't sell shorter term partials, but it's more difficult to sell a shorter term partial. Right. Um, and partials are less, uh, liquid. Uh, tell us how a partial works,
Justin Bogard:Right? So a partial, we're gonna, we're going to invest in a certain entitlement of that amateurization schedule. So if a loan had 20 years left on it, which would be 240 months, let's say Richard, I bought the next 120 months of that loan from you in a loan that you have in your portfolio. And so you sell it to me for a price and I buy it and those next 120 payments that come in are payments that come to me. Right. And I take full ownership of that loan in that entitlement schedule mm-hmm.<affirmative> and then Richard gets the back 10 years on it so it switches over to him after the 10 year and one month payment.
Richard Thornton:Right. And so one of the advantages of doing a partial, well disadvantages, it's not you, you can sell a partial, but it's not quite as liquid as a hypothecation. But one of the advantages is, is uh, you as a sponsor stay quite involved because you're really not getting paid up front for anything. You might get paid a couple thousand dollars just to do the transaction, but your payday is after me, um, the investor after I've fully been paid out and um, I'm, I'm Scott free at that point, right?
Justin Bogard:You're talking about, because you're the guy that owns the last 10 years of the note.
Richard Thornton:No, I, Right. So I'm, I've, I, if, if I've sold you a partial or an investor a partial, I'm not getting much of anything up front. I'm just, cuz I'm giving you all the cash flow, right? I'm taking a couple thousand dollars just to do the deal just to cover my costs. But I'm gonna stay very interested in that transaction and and uh, certainly help shepherd it along. What I always tell clients is, is they get an asset manager for free.
Justin Bogard:Yeah. So that, that's something that's good about it, right? So me as an investor that may not be as savvy as you, let's say in this hypothetical to where I've got you partnered in the deal with me so I feel more secure that hey, your money's in it and my money's in the deal together. I have lower risk cuz I'm first money in, first money out cuz I'm on the front end. But you got to take my money that I gave you to buy the portion of that loan and go out and reinvest it in whatever you want. So you have a lot of advantages and I have a lot of advantages too. So we marriage the two together and it makes for a great, um, partnership,
Richard Thornton:Right? So there again, you know, um, you, the investor are very secure mm-hmm<affirmative>, uh, not that things can't go wrong on these deals, but if I bought a$50,000 uh, note, uh, I'm probably only selling you say$25,000, uh, of that note for that first um, portion. So if I bought it at 60% loan to value and I'm selling you the first half of that, you're probably down at 30% loan to value in this house. Yeah. So you are very ex very secure in getting uh, paid.
Justin Bogard:Right. And if the worst thing that happens, if we have to go through foreclosure, guess what I get paid first cuz I'm in the first entitlement and then you get paid last. So Right. So it's really, really good for the front end investor. You're, you're very secure, you're very low risk. You're making a, a cash flow every month and you have true ownership of this partial.
Richard Thornton:Right. So how does that contrast or if I buy a whole note myself, if I sell you a whole note, how's that gonna be different?
Justin Bogard:Well, it's a little bit different because you own the entitle the entire entitlement schedule. So instead of having 10 years, I own the full 20 years. Now it's a bigger investment for me cuz I have to pony up more money to buy it. Right? And then also I get paid, uh, more as far as a return or a yield because I've got a little bit more risk because I own the entire note at the 60%, uh, you know, loan to value, as you said a minute ago versus my 30%. Right? So the more risk you have, the more reward you have.
Richard Thornton:So how do I manage that note day to day?
Justin Bogard:So you would have to be responsible and accountable for being the note, uh, manager of that loan. Mm-hmm.<affirmative>, you have a loan servicer that collects your payment, right? And they have a portal typically with those loan services so you can see the payments coming in, you can see the interactions, but you still kind of, you gotta play CEO to a certain extent because you have to manage the managers of your, of your loans as well. So you wanna make sure that, you know, you're checking in on it from time to time. And then when you find a problem with it, you have to deal with it. Right? You don't, you don't have a Richard or a Justin to help run those day to day operations for you. So it isn't a lot of involvement, but it can be short burst of involvement and then you may have long periods of time to where there's no involvement mm-hmm.<affirmative>. And so it kind of ebbs and flows like that. Now once you have a very large portfolio of loans, let's say 20 or 30 loans in your portfolio and you own all the loans together, well it, you do have to have somebody to help you manage and run that because you wanna stay on top of things. Because if three or four loans start getting behind, or if there's taxes that are due that aren't being paid and other things that you're catching along the way, you know, it can, it can eat up some of your time as well. But there is, on the other side of the hand, you do make more money because you're getting a higher return on having the full loan in your portfolio.
Richard Thornton:So what do I do if, if I, uh, uh, well A how do I find out and B what do I do if I find out that my borrower, let's say hasn't renewed his insurance, there's no insurance in the house. What happens?
Justin Bogard:So some servicers have tracking programs to where, where, excuse me, you can pay them a, a fee and they will have a service that tracks when the insurance is dropped. So the second that they know the expiration date happens on this, on this insurance policy and it doesn't get renewed, they automatically put a forced placed insurance policy on that house to cover you in the event of a total loss. Whether, Yeah. So the lender has the right to force an insurance policy on the property if it's not properly insured by the borrower,
Richard Thornton:Who pays that for
Justin Bogard:That? The lender advances the money up front and it's charged back to the borrower. The borrower pays them back over time or in a lump sum. So it's a, it's something that the, the borrower will incur those costs.
Richard Thornton:And how much do you get this insurance for?
Justin Bogard:It really depends. Is it, it's really what the home is worth and what the unpaid balance is, is what the insurance is gonna go after. So if the unpaid balance is a hundred thousand dollars, then we're gonna get the insurance to cover that unpaid balance as, as the, the force place lender here in this situation to where it could cost, uh, four or$500 for the year or it may cost a hundred dollars for the year depending on how low it is. So it really depends
Richard Thornton:What area you have you have to watch out for, for little gotchas like that is what I'm hearing you
Justin Bogard:Say. Yeah, you gotta watch out for it. So it's something you just wanna be aware of. So it's just like, like I said, you're just checking in on the loan and so there's a little bit more accountability with having the full loan. So those are kind of the annoying things that can happen. Like I said, Richard, this isn't a big time suck, it's just when they do happen it comes in small bursts and you have to be ready and active to stay on top of it and then know what to do as well. So if it's your first time investing in a note and you buy a note and you really haven't had any note in training or you don't know somebody like Richard or myself that's done a lot of deals before, you may be at a loss as far as what you need to do. Cuz sometimes as servicers, you know, they don't have time to educate you on that process. They say like, I need a decision from you. What, what do you wanna do here? And if you're not sure you know what to do, you might make the wrong decision.
Richard Thornton:Right. So, you know, I i coming outta the last recession, there was all these non-performing notes and people were making big bucks doing that. We've gone through the pandemic. My understanding is we're gonna have, uh, some more of those non-performing notes. How do I jump into that? Should I jump into that and, uh, what do I have to watch out for?
Justin Bogard:Well, that's an open-ended question that's, that's gonna take a while to walk through, but let's just hit the highlights here. Okay, Richard. So if it's your first time getting into notes and you want to jump into a non-performing note, it's probably best that you probably shouldn't do it alone. You should probably do it with a partner, either somebody that, uh, does the workout on it and you put up the money or you're splitting the money 50 50 with them and kind of partnering with them on that. Or Richard, you kind of learn as you go and you can invest into a fund that does, excuse me, that does buy into these non-performing loans and does'em in bulk. Hmm. And you can benefit from the cash flow that comes from them in the, in the resale of that product as well.
Richard Thornton:But what if I did, did want to get into it, buy a non-performing now what, what would I have to not, how would I do it? I assume I can go someplace and buy a note, but let's say now I have the note, gimme a quick thumbnail about what I, what I might have to do.
Justin Bogard:Well there's things that you wanna check from the get go. So the number one thing that can trump your position is property taxes. Mm-hmm.<affirmative>, you wanna make sure that the property taxes have not gone into the sale, the tax sale. Some states are tax de states and some states are tax lie states. And so in Indiana we uh, we we, you can get a lean on the properties with taxes until so much they go into a tax deed sale. So you can look that information up, it's all public record, you can actually call the county office, you can find out exactly what's going on or when the next sale is. So you can get those paid to where it doesn't go to the tax sale and you can lose the property. So that's number one. The number two, you obviously wanna make sure there's an insurance policy on the property because if the fire were to happen or, or if it's in a flood plane, you wanna make sure there's a flood insurance policy on it as well for a forced placed flood policy and you wanna make sure that's covered. So those are two things I would do first and then I would try to reach out to the, the borrower and figure out if you can get, uh, some sort of deal to work with them. Meaning, you know, can they really repay this debt or they just, they're just sol and they're just, you know, hoping that nobody forecloses on them. Mm-hmm.<affirmative> and that's kind of thumbnail.
Richard Thornton:Okay. Um, but I've, do I have to get the house renovated? Do I have to get, I
Justin Bogard:Mean well technically you don't own the house right now, so you technically can't go in there and start working on the house. If you do and the borrower ends up paying you off before you finish foreclosure, well guess what, Richard? You just gave them a free renovation. Mm-hmm.<affirmative>, you don't get any of that money back. Right. So you don't wanna do anything to the house. Now if it's vacant, you can secure it and you can't winterize it and protect the investment that way. Mm-hmm.<affirmative>, but you certainly don't wanna put any real work into the property until you actually own it as a re o or what we call a bank owned or also known as a real estate, uh, real estate owned asset.
Richard Thornton:Right. Right. Well, good. Well it sounds like, um, buying a non-performing note would be quite a challenge if I'm just starting out. I definit I probably want to, uh, do something with an experienced partner. Right?
Justin Bogard:Yeah, it's definitely highly encouraged. That's what we, that's what our suggestion is to anyone that wants to jump right into it. Um, there are people that have real estate experience still that I wouldn't, I wouldn't recommend them getting into non-performing. They have to have a lot of real estate experience, more than likely a fix and flip type of experience and have done a lot of deals and been in the game for a while really to, to make sure that they know what they're getting into. Mm-hmm.<affirmative>. So like I said, there's a small subset of those people that I would recommend. Okay. Yeah, you can probably handle a non performer, but more than likely it's like, no, it's best for you to step into a performing once you know, a performing loan and you get all the way through a deal and you have it for six or seven months, then you, you get the idea of how it works, what the process is, what to expect, how these vendors work with you and what you have to do, what they expect from you. And then non-performing, just adding a little layer to it of due diligence that you wouldn't have done with performing.
Richard Thornton:Right. Cool. All right, well that sounds like it's a lot of information
Justin Bogard:<laugh>. Yeah, it is. A lot of information packed into about 25 minutes there. Mm-hmm.<affirmative>. And we are at the end of our rope here, Richard. So, um, this episode number 22 is brought to you by Bright Path Notes and I am Justin Bogar, your host, and my partner here, Richard Thornton is on the call today. So I appreciate that. And Richard, we will see you next time.
Richard Thornton:Very good. Take
Justin Bogard:Care. All right. Bye
Speaker 4:Bye.
Narrator:Thanks for listening to Be the Bank. We hope you learn something from today's show. If you enjoyed this episode, please rate and review us. Plus check out our Bright Path Notes channel on YouTube and follow us on Facebook and Twitter at Be the Bank and on Instagram at Be the Bank podcast Be The Bank is sponsored by Bright Path Notes. Thanks again for listening.