Have a goal and focus on that to start making six figures in 2018. Put a cushion on your purchase price by focusing on assets worth $50,000 and not fix n’ flippers. Find out how owner occupied assets with high-rent rates and collecting back payments can earn you $250,000.
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A Note Closer’s Action Plan To Making Six Figures
This episode is something that a lot of people are going to get a lot out of. This topic is something that we have done on a regular basis, usually at least once a year. Usually it’s beginning of every workshop we teach just as a good way for everybody to understand literally how to make some money in note investing. One of the most important things you can keep in mind is the more focused you are at something, the better you’re going to be at it. I think we can all agree. Whether it’s fix and flipping or wholesaling or owner financing or subject 2 or whatever it is, being focused on something is one of the most critical aspects of it because it gives you literally the opportunity to focus on one thing. Being solely focused will give you exponential chance of being successful and making money versus running around trying to do four or five different things where you’re not going to have any success in any one of those.
If you’re listening on iTunes or Stitcher or one of our podcast platforms, thank you for listening. Make sure to leave a review if you enjoy it because I guarantee the topic we’ll talk about is something that’s going to leave you scratching your head. It’s going to leave you thinking. It’s going to leave you, “I think I can do that.” The reason why is the fact that we have a lot of students that have a very similar facet of this plan going out and making things happen. They’re literally out using this and implementing this plan and having success, making money in note investing, being successful and doing whatever they do that they call successful, whether it’s working full-time at this, working part-time, it’s traveling, use this to fund their lifestyle, take the job and shove it, traveling more, whatever it is. They are using this base model plan to make things happen. I highly recommend you go over and check out the live video feed on our WeCloseNotes.tv. Check it out because we are recording this. All our episodes that are online on podcast are also recorded on video. The reason is I’m going through a PowerPoint and it’s going to be valuable for you to actually check out the PowerPoint and follow along with me as we go through. This is a presentation that we have done a lot of times.
It literally comes down to taking action on a regular basis. If you want to make, say $250,000 in twelve months, if you want to make six figures in twelve months, this is the basic plan to do it with. Let’s break it down to the basics, literally break it down in nuts and bolts, “What do I have to do? What assets do I need to be going after to make this work?” These are pretty simple things. Let’s assume some things. I know when people say when you assume, you make an ass out of you and me both. Everybody needs some cashflow and everybody’s got to cover their bills on a monthly basis. Let’s assume you need $5,000 per month. If you need $10,000 per month then what you want to do is double the numbers. Let’s say you need $5,000 per month, that’s $60,000 a year. That covers a lot of people’s nuts. That covers a lot of your basics, a lot of things out there that you need to survive. Most of the non-performing assets we see across the country fall in the $75,000 value or less. This is a basic plan we’re talking about. I try to focus on $50,000 assets, unless of course they’re occupied and they’ve made payments in the last twelve months.
If you’re buying $50,000 assets, which you should be focused on roughly, you’re probably going to be picking those up at around 50% of fair market value. The UPB could be a lot higher but we’re looking as is values. $50,000 values, you’re picking it up roughly around 50% of fair market value paying roughly $25,000 for them. If you get them less than that, great. You can add a little cushion to your purchased price to put in your hip national bank if you need to. The key here is not chasing ugly assets. You don’t want to be in fix and flipper or notes. You want to chase assets that are owner-occupied. How do you verify if they’re owner-occupied? You do it like we do it in the office. Call the utility departments, have a drive-by and make sure that glass globe on the side of the house is running and it’s there and not vacant. You want to make sure that these assets are owner-occupied.
You also want to look on notes where the rent rate is higher than existing payment. The reason you want the rent rates higher than existing payments and they’re owner-occupied because I guarantee, if you’re dealing with borrowers who are not paying any or have been hit and miss, they already know what rent rate is for a similar house, and they’re already scared. They know that rent rates are often higher than whatever their existing mortgage payment is. They want to stay but don’t get me wrong, they already know what rent rate for a three-bedroom, two-bath house is or a two-two, whatever they’re living in. They know that rent rates are often higher so that’s what we want to focus on. The reason we also want to focus on rent rates being higher is that you don’t what them to look at a house and realize they can go down the road and rent something cheaper. There is no motivation for them to stay. You want them to stay and realize it makes sense for them to stay since it’s the cheapest route for them.
Another big thing you want to make sure are existing payments on the property, not the mortgage. You’re looking for somewhere in the $500 range. Another big thing, you definitely want rent rates to be over $500. Anytime I’ve ever bought an asset and the rent rate was less than $500, I needed guns to collect the rent or I need a flak jacket is probably a better way of putting it. Existing payments in the $500 range, it’s not that difficult. This isn’t as strict as the rent being over $500; maybe it’s $400, $350, or things like that. If you’re going to want to keep these people in the house, you’re going to want to collect back payments. If you’re going to do a forbearance or trial payment plan from the borrower, you want to try to collect some skin in the game, especially if they have not been paying for a while. I like to try to collect four months of back payments. If their payment is $500 a month and you collect four months, that’s $2,000. That’s not that difficult for people to collect up to $2,000.
I don’t care if it’s $1,000 now and I take that other $1,000 and spread that over the next four or five or six months. You just need to get some skin in the game and/or extra from your borrower. You’re going to use other people’s money to purchase these notes. You’re buying these at $0.50 on the dollar, I guarantee most of you who are fix and flippers aren’t going to go out and buy a house, a fix and flip, a rental, at $0.50 on the dollar. You’re buying the note and you’re controlling the debt, you’re controlling the asset. You’ve already got technically your tenant or you payee in place because the fact is they’re owner-occupied. Using others people’s money, where are you going to find other people’s money? You’re going to find these at the Quest IRA events and at the networking events you go to. You’re going to find this at the REI clubs, going out and talking, “I’ve got a note on a property. It’s worth $50,000. I can pay it up for $20,000, $25,000. Borrower’s in it, making a payment of $500 a month. We’ll go through some more of the specifics.”
If you borrow that $25,000 and you were going to go at 12% return, you’re going to give your IRA investor 12% return of their money. 12% of $25,000 is $3,000 per year is what you have to pay out to them. When you divide it by twelve months, that comes to $250 per month. Basically paying them 1% of the amount borrowed on a monthly basis. If you’re to get to the point where you’ve got $10,000 in cashflow, remember we talked about this earlier, $5,000 for you. If you’re using other people’s money, you’re going to be splitting your cashflow. You need to basically get $10,000 in cashflow coming in, $5,000 to you and $5,000 to your joint venture partners who are funding these deals for you to get to the point where you have $5,000 for yourself coming in, $5,000 divided by $250 per month comes to a total of twenty deals. You have twenty deals that you get re-performing. If it’s paying $500 a month and you split that 50-50, $250 to you and $250 to your funding partner. I don’t care if you’ve got one funding partner that’s funding all twenty deals or you’ve got twenty of them, you’re doing individual joint venture agreements with these people. Simple. You’ll be basically looking at twenty deals.
If you need to get to $60,000 a year in cashflow, that should be one of your big KPIs, your Key Performance Indicators, “I need to get twenty deals. How many offers do I have to make?” If you have a 10% acceptance ratio off the bat that means you’ll be making 200 offers in the first year to get your twenty deals. You get better over time as you hone your bidding process and you learn, but that’s a magical number. Twenty deals bringing in $250 a month to you is $5,000 a month. Most people can live on $5,000 a month. It’s not really living the high life but you’re still living and you’re your own boss at that point. If you’ve got $5,000 a month coming in off of cashflow times twelve months is $60,000 a year in income. If you take the skin in the game, the four months of payments that we’re asking the borrowers to make for you to do a trial modification or forbearance agreement, take that $2,000 times 20, that comes to another $40,000. Four payments of $500 equals $2,000 skin in the game; $2,000 extra times the 20 deals is another $40,000 in income.
If your borrowers are happy making 12%, I would not split that hip national bank money. I would keep it for yourself for doing extra work. Just keep them focused on making payments on time and splitting the payments with their JV partners. If you take those two numbers right there, the cashflow $60,000 plus the hip national bank money, add that together that’s $100,000 in income. Between those two ways of making money, skin in the game and split the cashflow, that’s $100,000. I would highly suggest that you share this. This is a really valuable strategy for a lot of real estate investors. This is a really great strategy that a lot of people are implementing and making things work in some fashion. We’ve got the Jay Tenenbaums or Wayne Snells, a lot of people out there are doing amazing things with this to really knock things out; the Gail Greenbergs, the Cody Coxes, myself. There’s a lot of great people that are using this as their base model for success.
Let’s talk about the assets. Let’s talk about the portfolio that you’ve got. These are $50,000-valued assets. If you’ve bought twenty of them, you have twenty of them working at worth $50,000, that’s $1 million portfolio. That’s $1 million in fair market value. If you had individual investors funding at $25,000 a pop times twenty deals, that comes to $500,000 funded. Buying these assets at $0.50 on the dollar to have $500,000 funded. If you’re paying your JV partners their split of cashflow which is basically $250 a month per asset, that’s $5,000. $5,000 times twelve is $60,000 to them. $60,000 in income of over $500,000 investment is a 12% ROI to them. They’re pretty happy. I get this question asked a lot, “How do we return your investor’s principal?” They don’t want to be in it for 30 years or five years. What do they do in twelve to eighteen months? A lot of times if an investor gain 12% of their money as a passive investor, they’re happier than a pig in slop. You’ve got to have an exit strategy plan. You may not want to have their money the entire time. Let’s talk about that.
If you have a note that’s been performing for twelve months on time, again it’s now a re-performing note. Twelve months of seasoning, of payments on time, it’s re-performing. Part of the reason you ask for the extra skin in the game, that extra four months of payments, it’s a buy-in by the borrower. It’s a buy-in by them to stay in the house, a buy-in that you’re working with them. It’s showing that they’re motivated to stay in the house. Twelve months of re-performing loans or payments and performance equals a re-performing loan. You can easily sell that re-performing loan at around 80% to fair market value, sometimes 85%, sometimes 90%. It depends on the return that your note buyer is looking for, but oftentimes you can find IRA investors to pick up your note relatively at 80%, 85%, those kinds of things. You’ve got $1 million fair market value portfolio, you’ve got 80% of that on a sales price. That means you would net $800,000 in note sale proceeds. That’s not too shabby. If you had an investor who want to have the cashflow, great. If you have a JV partner, they still want their money back too. $800,000 in note sales on those 20 notes, the investor or investors invested $500,000 with you, you paid back that $500,000, that would still give you $300,000 in profits off the note sale. Remember, it’s worth $1 million, you sold it for $800,000, you had $500,000 borrowed, that’s $300,000 in profits from the note sales. If your JV partners are on an equity split and they’re splitting that equity, splitting that $300,000 50/50, they get $150,000, you get $150,000.
Let’s figure out, if you did this what’s your income? You’ve got $150,000 from the note sale proceeds in the backend for twelve months of performance. You’ve got $60,000 along the way in cashflow for the performing notes. You’ve also got $40,000 skin in the game from the borrower in the frontend. You made money in the frontend, the middle and the end. Add those numbers together, that comes to $250,000 in income. That’s not too shabby. That’s not a bad twelve months. This is just based off what you get performing. Will you have other assets that you may be wholesaling on the side? Or you don’t end up re-performing, it ended up foreclosing on. Yes, that’s correct. You probably will. Our buddy Adam Adams, I think his first six out of eight notes were deceased. You’re not going to have a dead person paying on time. It doesn’t mean you’re not making some good-sized checks on the foreclosures. I like cashflow, so let’s go take this other route.
Let’s talk about what your JV partner has gotten. $60,000 in cashflow, which is 50/50 of the loan mods of the cashflow. They got 50% of the note sale proceeds. Remember this, if we sold it at $800,000 and we had them borrow at $500,000, that gives us $300,000 in profits which equals $150,000 to them. They’ve got $150,000 plus the $60,000, that’s $210,000 in income on those twenty deals over twelve plus months. $210,000 divided by a $500,000 investment, that’s a nice whopping 42% ROI. That’s not too shabby. Your investors are pretty happy. Let’s just say you were able to negotiate with your funding partners that they only want a 12% return, they didn’t want a split of equity. They didn’t want to split the cashflow. They just want to make their 12% return on their money. That’s okay. You still have them paying out monthly on the split of cashflow, you sell the notes after twelve months at $800,000, you pay back the $500,000 principal to your investors. Remember, if they’re getting half the cashflow, they’re getting 12% cash-on-cash return on their investment. They get their $500,000 back, you don’t owe them anything more. Splitting that $300,000, you’re keeping that profit all for yourself. Let’s add that now to the $60,000 cashflow you got along the way, plus the $40,000 skin in the game that you got from the borrowers. That’s a $400,000 income to you, and your investors are happy at 12%.
A lot of people are like, “If I make $400,000 in a year, I would be able to sell fund.” Why? Keep that money for the really good deals and take your investor’s money and do it again. That’s the thing to keep in mind. Investors are happy at 12%. They’d be like, “Can you take my $500,000? Can you keep it working?” “Yes, I can keep it working. I’m going to put it in some new deals.” Then you rinse and repeat, rinse and repeat, rinse and repeat. Now you’ve got a bigger buying power. Let’s say you only need $100,000 to survive on, that’s $300,000 that you could use to leverage and use that money for other deals if you want to. Instead of buying twenty, you’re buying twenty plus maybe another 32 in your second year, and you’re making a lot of money. You can also just keep the cashflow, maybe you don’t have to pay out. Maybe you’re happy getting that 12% return on your money. Really for you, if you’re getting half of the cashflow and you have none of your own money invested, that’s an infinite return on investment. It’s pretty good. Infinite.
We’ve got some questions, “What was the hip national bank?”
That’s called your pocket, hip national bank. That’s where it goes. That $4,000 or that $2,000 per asset on the four months of payments goes directly into your pocket. That’s your skin in the game. You’ll get used to that for doing so well. A lot of people are like, “What’s hip bank?” They haven’t heard it before. I actually got that statement from Ron LeGrand back in the day about thirteen years ago. Let’s go and do a quick little recap. You’re looking at assets of $500 a month payments times twelve months times twenty deals, that would equal a total of $120,000 in cashflow. You’re splitting that with your funding partners at 50/50, so you’re getting $60,000 and so is you. You’re going to try to collect at least $2,000 of back payments from the borrower. $2,000 back payments of skin from the borrower times 20, it’s $40,000 that go in the hip national bank. You have one or two options. You can split the loan sale proceeds when you sell the loan off, 50/50 with the JV or just pay a 12% ROI. Hopefully, the payments coming in have paid that along the way. Your investors are happy. You’re happy because you’re making money and going from there.
This is a pretty simple plan of action. You just have to do it. Is this going to happen in the first month? No. It’s not going to happen the first month. We’ve had people that have had it happen in the first month where they bought twenty notes, they were rocking down the road. I think one of the biggest a-ha moment from the Note Mastermind group is we were going through cases. We do a lot of fun stuff with case studies where we go through, “Here are the basics. Here’s what happened with the deal. Here’s where we are with the deal. Here’s what we learned during due diligence. What would you be offering?” We split the group up into roundtable with chairs and then each table talks about what to bid on. They send a guy or a gal up to bid on it. I tell them, “You’re good. You’re high. You’re low,” and then I share exactly what I paid for the deal or what the investor paid. I have to give a big shout-out to Dan Zitofsky and Howard Marcalle for sharing some of their deals as well. We go through those and it’s a lot of fun. A lot of people are getting a lot out of it.
What’s really nice is sharing and seeing the bids coming closer and closer together, not so far off, not somebody who’s just making a really low-ball offer. One of the things too is a lot of times if somebody makes a really low-ball offer, I just kick them out, “I’m not playing about it, you’re blacklisted.” We have a lot of fun with it. It’s a learning experience for those that are attending for the first time or the second time. I think one of the biggest things we’ve got is, “I don’t know if I can bid that on that one asset.” I’m like, “I close on a lot of deals because I make a lot of offers.” I’ve been making 100 offers. Me and my team will come up, we get a tape of 400 assets, then we’ll make 100 initial offers. We run a couple of numbers. We’re not going to do full due diligence on every asset before making an offering. We’re going to make something based off some basic numbers, if it’s occupied, if they made a payment in the last twelve months. We want to make an offering where the P&I payments are coming to somewhere between 30%,35% on the frontend and we’ll settle for roughly closer to 20%, 24% after we look at our due diligence and counters back and forth.
Out of 400 assets, we make 100 offers. We probably get 60 to 70 countered back. We know we’re probably going to close on a third or a half of those. We don’t get so bent out of shape worrying about the specifics of one deal on the front end until we get counters back in our due diligence. That’s why we know we’re going to settle on 20 to 30 of this final number because we know a lot are going to get kicked to the curb, either taxes or utilities or it’s trashed out or is unoccupied. That’s the biggest thing if you’re going to get ahead in this game, this is a numbers game. I know it’s so different coming from a fix and flip side where so many people feel the tangibility of a property. They’re picking out the paint, the carpet, what it looks like, the landscaping, the curb appeal. I get that. I totally get that, I’ve been there. If you’re going to make money in the long run in the note game, it is a numbers game. You’ve got some leverage with other assets and then you’re spreading your risk across the board to make things a little bit easier for you. If you do have a little take on one asset, as long as you’re doing your due diligence on every one of them, if you missed one something on one thing, you’ve got the other nineteen or ten to help curb or round off that error.
We’ve got a question, “Get comfortable with hearing no. Actually, start counting and don’t stop until you get 50 nos. How many yes did you get in the interim?”
Yes, it’s true. Get used to it, especially when you’re calling banks or making offers, you’re going to get a lot of nos, but the yeses along the way are going to be good. When I started calling banks, I called 54 banks before I got my first yes. 54 nos until I got my first yes. It was a nice tape from a mortgage company out of Houston, Texas. I made $50,000 off that deal because it was a pool trade and I had five people actually and we split a $250,000 profit. A $5 million portfolio trade, we made $250,000 on it, split if five-ways. I made $50,000 for my time. That’s when I knew this is where I needed to focus on. How many people get the one no and then give up or ten nos and give up or 20 or 30 and give up? It’s the same thing with asset bids. Keep making offers. If you’re told no, ask, “How close was I? Where was I in the bid process? Was I too late? Was I too early? Was I too high? Was I too low?” “You’re too late. What takes you long?” That type of feedback and asking those questions to your sellers is a great education and great learning curve. It helps you with the learning curve. To understand, “I need to adjust my bids. Does this makes sense?” One thing you have to keep in mind too is make sure your bids don’t trash out your ROI calculator or your expectations. That is one thing. I know there are some people that do all these ROI calculations on the frontend and they’ve never even looked at the property yet. I’m like, “You’re over-analyzing the frontend.” If you’ve never sent a realtor out to look at the property, you’re doing all this extra work when you don’t know what the property is really truly worth. You can go up to Zillow or eAppraise or things like that.
Another question, “Do mortgage wholesalers have distressed assets or just fund and sell to banks?”
A lot of mortgage bankers have a wholesale line, have a warehouse line. They’re basically note-funded from their warehouse line in true amount and immediately sell it to the mother ship, I like to say it. They don’t usually have distressed assets unless they’ve had to buy back one of the assets from their parent bank, the warehouse line lender. That usually happens if the borrower goes default in the first six months, so they’ll have to buy back that note at full price and then they’re looking to sell that off. If you’re calling mortgage bankers or banks and lenders that have warehouse lines, you’ll find some. I guarantee, every lender that provides a warehouse line to a mom-and-pop mortgage banker or a mortgage banker in the city, they’re going to have a distressed asset at some point. That may not be selling at $0.50 on the dollar but I guarantee we’ve bought some distressed assets off warehouse lines at $0.70, $0.65, or even at $0.50, but we haven’t bought anything at $0.50 in a while.
One thing to keep in mind too, if your bid isn’t accepted and somebody else buys it, follow up in 30 days. Make sure that that investor closed on the deal. If you remember, we had Dan Zitofsky on a while back, I think episode 165, talking about how he made an offering on a Memphis asset and it came back way high, carried away too high it didn’t make any sense. The rest of the story is that asset never closed and it reappeared about a month later from the same seller. Dan I think made another offering on this said, “You’re not going to close at what you think it’s worth. These are the actual numbers.” I can’t remember if he bought it or not, but a lot of times we have followed up in 30, 60 days, one stuff was supposed to close that didn’t close and picked up the assets because we were actually able to close. Follow-up is one of the best things you can do in this industry. A lot of people won’t follow up. If something falls out of closing because of due diligence or the borrowers didn’t fund in time or something popped up that scared them, just follow up, “Is this still available? Did this ever close?”
Another thing too to keep in mind is if you’re bidding on assets and the pool gets sold off from underneath. We’ve had this happen. It’s a common occurrence where we made twenty offers and the whole tape gets sold to somebody. Don’t flip out. One of the things that I love to do is like, “You sold the whole tape. Can you please forward my bids to who bought the tape? See if I can still buy one or two from them when they bought the whole tape.” That’s worked out really well too in some cases where we’ve been able to buy our assets we still wanted but we didn’t buy it from the original seller, we bought it from the new buyer. They were like, “Yeah, we’ll recoup some of our funding amount and sell you a couple of assets off.” They might be a little bit higher but this is why it’s important to know where your numbers are at. “What’s the true value? Do I have room in my bidding or my final offering that bumped up the price a little bit?” That new fund may not make 50% in over twelve months but they may make 5% or 10% in 30 days. That 10% in 30 days equates to 120% return on that one asset alone. It’s something to keep in mind for you.
Hopefully this has been helpful for you. Go to WeCloseNotes.tv, that’s where all of our videos are at. It’s where you’ll find the actual videos of the podcast so you can go back and watch as I go through the PowerPoint. That may help you out quite a bit as well with things. It’s all about making money. If you have a plan of action in something that you focus on, you’re going to find success. It’s also going to keep you from drifting and making offers on oddball assets or stuff that doesn’t fit into your wheelhouse. If you think about a good baseball player, especially a power hitter or a good hitter, they have their pitch, their strike zone. You’ve seen the strike zone, if you ever watched a baseball game, some high, some low, some belt line, then you have inside the base, right over the base and then outside pitches. You will see a lot of times heat mapping of where the batter likes to hit their favorite, their wheelhouse, their hotspots. If they can get a pitch in that hotspot, they’re going to swing and try to hit it. We’re a lot like that as note investors. You’ve got your things there in your perfect sweet spot that you go for. Try to avoid that way higher out of the strike zone or pulling the hitter or just a bit outside. Keep in line what you like, what you’re good at, where you’re going to make the most money, and stick to those. Anytime that I have gotten outside of my strike zone is when I’ve actually struck out. Whenever I had deals that drag on a lot longer than expected and when I should have stuck to my bread and butter.
Hopefully, this has been valuable for you on how to make six figures in 2018. I know that 2018, a lot of people have a lot of big things planned. I think it’s going to be a phenomenal year. We’ve had a great 2017 and we expect 2018 to be even better. We’ve had our ups and downs like in any other year but we really, really love where we’ve come and we really love where our journey is going to take us. I hope that each of you take this plan of action and try to apply it to what you’re focused on in the note business. We’ve helped a lot of people with this. It served, as I said before, a great plan of action for many people. It’s not without its flaws, little bit of ups and downs. If you’re paying above $0.50 on the dollar, you’re going to knock the season at a much higher return. If you’re paying below, you’re going to see a higher return. Just keep in mind, the more offers you’re going to make, the better price you get, the better you’re going to be at bidding, and the more profits you’re going to make. That’s all I’ve got for you. Go out and make something happen. We look forward to seeing you all at the top