Be The Bank
Be The Bank
019 - Whole Hog
Are you ready to upgrade your understanding of real estate note investing? We'll unravel the complexities of active and passive note investing, empowering you to build wealth and take control as the 'bank'.
Hashing out the realities of running a note business. We'll even discuss the balance between maintaining a full-time job while being a note investor, providing a nuanced perspective to guide your decisions. Get ready to deep dive into self-directed IRAs, facing the current yield environment, and the importance of volume. We'll also touch upon flipping notes and the potential of land contracts as investments. Remember, note investing is a balancing act between risk and returns, and having a strategic plan is crucial. So gear up and get ready to ‘Be the Bank’.
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:
Facebook - bethebank
Twitter - bethebank1
Instagram - bethebankpodcast
American Note Buyers - https://anbfunds.com/
Monthly Broadcast - https://youtube.com/playlist?list=PLzc944w1xydt5aLDrrEPHJhdJeDkBjjD4
Interested in real estate. How about wealth? Well, they go hand in hand, and here you'll learn all about it. Welcome to Be the Bank, a podcast where we discuss and debate the topics centered around real estate investing. Your host, justin Bogart, shares 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. This is Be the Bank brought to you by American Notebuyers. Now here's your host, justin Bogart.
Justin Bogard:Hey, hey, internet. This is episode number 19 on season five of the Be the Bank podcast brought to you by American Notebuyers. I am Justin Bogart. We're going to be discussing kind of activity versus passivity in the real estate note sector and we'll have Mr Richard Thurton on to help us through that conversation today. So stay tuned. That logo never gets old, does it, Richard?
Richard Thornton:No, I like it. You know, when our graphic artist came up with that was out of the five he or she gave us, that was the definite winner.
Justin Bogard:That's pretty cool If you guys would like to see what we're talking about. Every time we record our podcast, we also record the video stream of it as well on our YouTube channel. So if you go to the American Notebuyers YouTube channel, you can check that out on episode number 19 of season five, and so it's just a little animation, like Richard said, and it kind of makes some transition and it turns into our logo at the last minute. So it looks pretty cool.
Richard Thornton:They call it the architectural view. So they draw it out like it's architectural drawing and then poof, all of a sudden you've got reality.
Justin Bogard:Did you take some architectural classes?
Richard Thornton:I did. I was actually trained as a landscape architect for a little bit before I switched to urban planning and other in finance and other things. But yeah, I did.
Justin Bogard:It's pretty cool. So is it finally warming up or cooling down in the Bay Area?
Richard Thornton:Well, it is, but it isn't. Yes, and the reason I say that's because the mornings have been quite chilly and it does. It's getting up in the mid 80s in the afternoon now. So it's really quite nice, but we had probably one of the coldest summers we've had in a long time. But that has not been your case, right? You had a nice, warm summer.
Justin Bogard:No, it seems like the Midwest out here and the southern states like Texas. They definitely got a lot of extreme heat. We pegged 100 a couple of times this summer, which isn't unusual, but it's not typically normal to go over 100 a couple of times. But yeah, we had a consistent week or two. I want to say that was 90 to 95, which is pretty fabulously warm. We usually hit that a few times and it jumps back down to high 80s, but this week isn't bad. Yesterday I got up to 80 and I think it's going to be 70 and overcast most of the week now. So it'll be getting closer to what we feel like fall. So everyone's kind of getting excited now. Hopefully the leaves will change in a month or so.
Richard Thornton:Yeah, I mean, I don't know. I mean, weather in general this year has been kind of crazy worldwide. I don't know if we can attribute it to global warming or whatever, but between the fires in Canada and Greece and the floods in Libya that they're having right now and all that it's, there's a lot of people who are really not doing very well because of all that.
Justin Bogard:That's too bad. I don't like to see that happening. There was, that wasn't a big fire in Hawaii.
Richard Thornton:Yes, maui, that's right. That's another thing I'd forgotten. All about that.
Justin Bogard:That's closer to home.
Richard Thornton:A closer to home and a good friend of mine who runs a property management company was just about ready to buy a company that manages over 150 homes in Maui and he was supposed to sign all the documents the day after the fire and every house that he was going to manage burnt down.
Justin Bogard:Oh my gosh. Yeah, that is crazy timing right there.
Richard Thornton:It is.
Justin Bogard:Hang on. Well, today we are going to be discussing a topic that you and I have always had offline conversations about, but we thought it would be interesting to bring kind of on air today. And that is kind of what reality is when you are a fully active note investor. And so, richard, I just want to probably start us down a conversation here and start by saying all of that doesn't necessarily mean it doesn't have to be like that's absolutely.
Justin Bogard:Colleagues, right that when I got into this real estate no investing business I obviously didn't have a large bankroll, I didn't have much money. I had some retirement savings and a little bit of cash. So I couldn't go out and buy a lot of loans, I could just buy a couple of small ones. And so then I kind of run out of money quickly and my option really is, the only way I can make more money is to somehow be some sort of facilitator to where I can find deals and I can find people who need deals and kind of merge the two together and add some sort of value in between to make it easier for that buyer and that seller to make kind of a fee income. On the other hand, if somebody has a lot of money they want to invest in and they wanna learn this craft. It becomes a little bit of an easier segue to get into it and become a fully active note investor, but there are some other challenges to it. So what's your initial thought?
Richard Thornton:Well, I think when we initially talked about this, I think you and I both looked at notes coming from different backgrounds and different levels of expertise and said the best way to make this work is to jump into it whole hog.
Richard Thornton:So let's quit our day job and jump in with both feet. I mean, there'll be a couple of months or six months or something like that, but basically the intent was to get in whole hog, which meant that you're gonna be buying, investing, and you had to get to know people and you had to if you wanted to. The traditional line people talk about is when you get in your broker notes and you make money brokering notes and then you move forward from there. You got more money in your pocket, you can move forward and that's a good thing and that's a regular way to do it. But the reality, I think, is that you have to look at the yields that you're getting and once you get into a business full time, you've got a lot of expenses that you ordinarily wouldn't have. What are you're going through that right now and sort of looking at some of what we have. What are some of the things that you see are nickel and diming us in our business?
Justin Bogard:Well, there's just a lot of things that I think all of us just as consumers and as business leaders for our companies we tend to end up getting too many subscription models that we don't really need, and maybe at the time it made sense and it sounded like, oh, that cost can be absorbed because we make enough money. Or maybe we don't make enough money and then when you start getting granular with the monthly cash flows that are coming in and the expenses that are going out and the liabilities you have to pay, you start to see some things get out of line, and so it's pretty easy to get out of bounds, I'll say, with subscriptions. I'm talking about subscriptions to things that you need, like maybe some sort of reporting or some sort of CRM you have, or a subscription for access to certain things that we may need to use, and sometimes they're just kind of nice to have, but you can live without them. And so that's when we have to decide can we really sustain that? And so when you run a business as a note business, you really have to make sure that you understand your expenses, because this is a cash flow business, right, we are not traditionally flipping loans as a full business model. We're kind of holding the notes for the cash flow. So then our yield, as you mentioned before, needs to be a little bit higher than if I was just investing in my retirement account and it was just my money and there was really no essentially no expenses or no overhead with it, because it's just my retirement account.
Justin Bogard:When you're running a business, obviously you have many other expenses, just like running any business in general, like a restaurant or a brick and mortar store. You know just stuff like that. So I think it becomes really challenging, richard, to be honest with you, it's not. I think very few people make the opportunity to have their note business be a really thriving business.
Justin Bogard:A lot of times, like any other entrepreneur endeavor that someone would go down, it becomes a numbers game, like it is a low chance of success because of all the hurdles you have to go around and go through and it's really a three-headed monster, richard, like with you managing marketing. That's all the beast in itself, you know, and including in that is also social media, which is a whole other avenue of challenges to try to get your content across versus other competitors, so to speak, that are in the same market, because our market is the United States, which is every note investor's market is the United States. Right, nobody is advertising specifically for like a city because it's just so hard to get inventory for a specific region. So that's why we're more broad, broad, focused of marketing.
Richard Thornton:Right. So let's give everybody a little bit of context here, because without getting specifics, you could walk away with this with a very different attitude. So what we're talking about is, you're right, crm. Maybe you have Zoho, maybe you have the watered down Salesforce or whatever CRM and you cost $200 a month for that. And you've got DocuSign and that costs $50 a month and you've got whatever else those little things that you have to have and all of a sudden you turn around and you're spending $2,000 a month on this kind of stuff.
Richard Thornton:And if you are like me, so I had going into the pandemic. I had a bunch of notes and I sold a whole lot of my inventory off because people wanted to. I thought I was going to get hammered in the pandemic. You and I have talked about this and it turns out it was one of the best sales transaction times that I could ever had. In the first year I sold two thirds of my portfolio.
Richard Thornton:So right now I've only got about 35 notes left and I am very much concerned with even though we're running A and B. I'm not doing advertising for my old company or anything like that. I've just got an accountant that's keeping me my average 15% yield that I was getting is coming in around 10% and I'm going. Well, gosh, that's not really what I got into this for, whereas if I and so that's my day-to-day income If I had another job, a day job, something like that, didn't have all the advertising, didn't have a CRM, didn't have a water, and I was just doing this on an Excel spreadsheet, my results would be a lot better.
Justin Bogard:Yeah, yeah, so it's. It's like once you get into this business, you really you really have to, you really have to make a dent Pretty quickly, I think, to sustain it, because some people I would say most people now Don't get into this full-time right away. I think they have to build towards it. So they maybe have, they may have a really good full-time job, maybe they're an attorney or a dentist or maybe they're some sort of have a legal profession to where they have, you know, some disposable income and they can invest in, and then they're just trying to build that up and understand how it works. And I think that's a really good model to get into, to build your way towards it.
Justin Bogard:But just to jump in whole hog, as you said earlier that that is more difficult and and there's a low probability, you know, get getting out and making the money because there's so many Unique hurdles to go through that even though you and I have both been through that part of the business and started our own Businesses before we can find this one. It's it's not for everybody, I guess I would say, and it's it's just very, it's very difficult because I couldn't write a book and Tell you exactly the blueprint that I did. It may not work for you and you could write a book and have your blueprint on how you did it and it may not work for somebody else either. There's no, there's no like magic, magic way that this works. If you have a franchise right, if you're part of a franchise, franchisee Then you have a blueprint that is proven and it does work, because and it works in any market, because they had it figured out and they've done it in so many different places. So yeah.
Richard Thornton:So I mean, I can think of several people that I've bought and sold notes with and they're doing notes on the side and it's actually what's what's a good term. It actually Helps out their practice. So they're a real estate broker or they're a property manager. They're dealing in something that's real estate oriented already.
Justin Bogard:So I'm a nice compliments.
Richard Thornton:That's your, that's. That's a good way to thank you, so it's complimentary. As they're there, they don't have to advertise or maybe doing it through their self-directed IRA things like that that sort of takes care of the accounting portion of it right there, so they're not having to have an extra accountant and do all sort of tax reporting. That's a great way to do it and that's a good way to build up, I think, a sizable portfolio and not have the headaches that you do running a regular day-to-day business.
Justin Bogard:Yeah, yeah, the day-to-day is is it's not passive what we do. We're full, fully active note investors making passive income but we are not passive in the business, if I can say that. So we're kind of actively passive yeah and until you get up to.
Richard Thornton:Until you get up to, like you know, probably 100 notes or something I get in your portfolio, if you're in your terms of just buying them and holding them and Taking the yield off of that at today's yields. You know when 10 years ago, when you could buy a performing note at 18 to 25 percent yield, it was a whole lot easier to make the numbers work. But at today's days yields where we're buying things With a lot less return, you have to have a lot more notes in your portfolio and therefore a lot more of your own capital in it before you get to make things work. Yeah, the volume helps.
Justin Bogard:Definitely helps with the cash flow and I can absorb, absorb a little bit of a loss To yeah so and my instance.
Richard Thornton:I sold a whole lot of partials up front and that's great because I got to. You know I had a quick turn model. I'd my goal although I seldom made it made it was to sell, to turn my money over three times in a year with, with one note, so I'd buy enough for 40,000, sell a partial on it, basically sell out of that. Take that same 40 by and sell and by, and sell and by and sell. I made two times quite often, but it was three. Was was tough. Yeah, that's great.
Richard Thornton:But I had to do To cover my nut on that. I had to do 10 year partials for the most part, so it's not going to be Probably another two or three years before I start to see any of that income reverting back to me. On those partials that I sold Um, well, if you look at on a yield basis, it's a great yield. I don't have anything in it but, um, I kind of don't have any income for a while. Lots of chance you take right and, depending on where you're at in your life cycle.
Justin Bogard:That may be a good decision for you, or may you may need to accelerate that and get the money sooner. Or you can wait 20 or 25 years, just depending on how old you are and where you're at and what you need to do. So I guess, richard, what, what we're trying to get to the to the point is that, um, you know, if you're getting into this business and you have a large amount of disposable income we're talking, you know, uh, several hundred thousand dollars to you know, in the millions Then getting into it full time right away is is not as big of a challenge as it is If you really don't have the capital or the resources for it. Um, because the challenges of Flipping a loan, or what we call brokering a loan, uh, like you mentioned before, the margins are a little bit thinner than they used to be, so it's harder to sustain a velocity amount. You have to do a lot of those transactions to really make a good living, as opposed to, you know, eight years ago, when you could do that and you didn't have to flip that many loans and you can make a really good living because the margins were much greater, much sweeter.
Justin Bogard:So, getting into this business, if you have money, that's a great way to be active quickly, but if you don't, it's probably is best for you to, you know, keep your part time or full time job and then kind of doing this on the side to build towards it. Because I agree with what you said, richard, it does take away more time that you have outside of, like your W2 job, but if you're able to do this this work part time you can you can make some good money. You just don't get a lot of return your time because you have to work a little bit harder, you know, on a part time basis with this.
Richard Thornton:Right, and so I think something else we want to talk about a little bit today was maybe land contracts and the use of land contracts, that you want to bring that up or not.
Justin Bogard:Since you brought it up, I guess we have to.
Richard Thornton:Uh-oh, I guess we have to Okay.
Justin Bogard:Land contracts. We in our fund, I think we may have one land contract. I think everything else is pretty much a need to trust or a need to mortgage, depending on what state it's in. In my personal portfolio I only have a handful of land contracts left. I've either converted them to note mortgages or I have just sold them off because people had needed good cash flowing assets and they just have to be land contracts.
Justin Bogard:I continue to get notices from the counties, even though I have sold those assets months or years ago, because the counties are so slow to update information and you can have the new buyer call into the county and kind of update the records of where to send the statements to.
Justin Bogard:But at the end of the day it's if you can avoid doing a contract for a deed or land contract. It's going to be a lot better for everybody involved. If you don't do that. There are certain instances where you would want to do a contract for deed slash land contract and that would be more or less when you're wrapping a mortgage, meaning Richard has a mortgage on this investment property and he wants to resell that property on a land contract so that Richard would stay on the deed and then he wouldn't trigger a do on sale clause. Those would be appropriate reasons why you would want to do a land contract. But outside of that, I know you're on the same side of the story as me and I'll let you chime in, but I'm definitely not choosing to do a land contract.
Richard Thornton:Yeah. So I think a lot of people out there would say, gee, I don't see any reason to change from one. But I've run across two reasons lately to get out of them. One is that I'm getting, as you said, constant notices from the county and things like that about hey, you know, you've got a trailer parked in your front yard, I'm in California and that front yard happens to be in Ohio. So minor things like that. That's more of a nuisance.
Richard Thornton:But it comes down to title. I just lost a sale on one property. My borrower said, hey, look, I'd like to sell and we got to title company and title company said I'm not touching this, we're not going to do this at all. We really don't consider this to be a clean deal. It's a cloud on title. So basically go out and convert it to note and mortgage before we even look at it. And if you are on any sort of time constraint to sell, that's just something you don't want to deal with. How much does it cost and how long is it taking you to convert most of those that you have, justin?
Justin Bogard:I mean it depends on the state that you're in, but I'd say anywhere from probably $600 to $1,600.
Richard Thornton:Well, yeah, I mean I've got I don't know how many land contracts. I've got more than I should, but I'm going to go about converting all of those, I think, just because I don't want to run into any more problems like this.
Justin Bogard:And I know that sounds like a lot of money, but in all actuality, you know, this is a conversation that we would have with the borrower and we would lay out all the pluses for them. Right, look your situation now. You are not on the deed. You aware of that and maybe like no, I'm not. Well, if you want to be on the deed, this is a way to get you on the deed. We can ensure the title right now to make sure that it's clean of any you know encumbrances, and then we can also get a policy that guarantees that the lien is there and that your lien is valid and active, and it gives you more protection and it gives us more protection.
Justin Bogard:And so when you go and sell the property, you're not going to have these title companies that are going to push back and say wait a minute, this is a foreign object to us, we don't understand it, so we're just not going to move forward with it. So oftentimes I've gotten the borrowers to come forward and actually help pay for some of the costs as well. You know I'll pay for like the title policy, because that's a general thing a seller would do for a buyer, but everything else you know is something they would pay for. You know, recording the deed, the split, split the cost of generating the note and mortgage. So yeah, that's kind of my answer to your question on the cost and stuff.
Richard Thornton:Yeah, so I mean, that's what I came from. The school of no, it doesn't make any difference, and I've slowly come around to saying yes, it does, so we just bring that up to listeners to.
Justin Bogard:It does. When you have many of them. Yeah, if you just have one or two, you know. If the opportunity presents itself, of course, go ahead and change it and convert it. You know it's when you have many of these, like Richard and I do, it becomes a real nuisance, right, getting all the notices. And because at first when you get a notice from a county, you're thinking, oh God, what happened? What do I owe on this one? You think of it like a bill that you're getting that you're just not happy about. And it turns out that's usually just just some sort of notice that says, hey, the taxes are due and this is what the assessment is on it. Or sometimes it is a bad thing where it's hey, there's a camper in the yard that's not supposed to be there and we're going to charge you $350 to you and you're the deeded owner. Right, good luck trying to explain to the county that it's a land contract and you don't really own it, but you do.
Richard Thornton:Yeah. So one issue one property I had in Missouri the owner triggered. Actually, here's what happened the county got wind of the land contract and they said that he was a tenant living in the property and I said no, he's not a tenant, he's the owner. I said no, no, as far as workers are concerned, he's a tenant. Well, as soon as he was a tenant, that triggered the landlord lease laws there and they had to do a property inspection. Well, they had to do a property inspection and guess what? They found $4,000 or $5,000 worth of items that need to be taken care of in the house to make it fit for what they considered to be occupancy by a tenant. And they were just fine things. They were small things but they were gotchas. So all of a sudden he settled with $5,000 or $6,000. Just, you can imagine the amount of time that I had to spend on that and going back and forth and explaining it and blah, blah, blah, blah. Oh, yeah, yeah.
Justin Bogard:It's endless, endless. A lot of fun yeah.
Richard Thornton:So do a mortgage, do a deep trust. It's simple.
Justin Bogard:It doesn't cost anything different.
Richard Thornton:Yeah.
Justin Bogard:You get no advantages Anybody listening to this or watching this. You get no advantages Having a contract for your land contract. You can't tell me that you can evict them if they don't make their first payment. It doesn't work like you think. A lot of judges do not like laying contracts, and so they will make you foreclose on them as if it was a note in mortgage anyways.
Richard Thornton:Yeah, even though your paperwork says otherwise, you still, in a lot of cases, have to handle it as if it were a mortgage.
Justin Bogard:Yeah, that's all the time we got for today. Thanks, richard, for joining us again. This is episode number 19, season five of the Be the Bank podcast. You can check out our future. We've run out of time again We've run out of time. Oh my God. Yeah, it's been so fun man.
Richard Thornton:Check out our.
Justin Bogard:YouTube channel American Note Buyers YouTube channel. You can check out the video feed in our monthly broadcast that we do live, which by time this airs we would already have it, so I guess you'll miss it, but you can watch the replay if you go to YouTube channel. But that we have a cool case study with Mr Drew Shepherd. He's one of our learning mentees here and in his apprenticeship and so he's got a cool little case study and I think you guys will enjoy it. So watch the replay of that if you didn't get a chance to watch it live until then. Justin Bogard, this is Richard Thornton and we will see you guys next time.
Richard Thornton:Okay, Bye-bye everybody.
Narrator:Thanks for listening to Be the Bank. We hope you learned something from today's show. If you enjoyed this episode, please rate and review us. Plus, check out our 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 American Note Buyers. Thanks again for listening.
