Best Cashflow Rentals or Notes/Paper??? - Posted by Mark H

Posted by John Behle on September 18, 2007 at 13:23:27:

I posted the answer to your question up above at the top of the forum.

Best Cashflow Rentals or Notes/Paper??? - Posted by Mark H

Posted by Mark H on September 16, 2007 at 18:44:54:

Hello,

My goal right now is cashflow. I have a couple rentals and currently I cashflow $570 a month after mortgage payments.

I look at the cashflow articles and they are almost all about making money on notes.

This page is about realestate- but the cashflow area has very little to do with being a landlord…?

What makes paper so apealing over being a landlord?

Notes and Real Estate a perfect marriage - Posted by John Behle

Posted by John Behle on September 18, 2007 at 13:51:26:

I posted below about the advantages of paper if you were in some way choosing between real estate investment and paper investment. But, a choice between the two isn’t needed. I couldn’t imagine a choice. It’s like choosing between steak and lobster when you can have both.

One of the things I’ve watched over the years that is a crying shame is that the division between the two forms of investment is growing instead of shrinking. It’s the second law of thermodynamics at it’s worst. Reverse evolution - or the real kind.

Years ago paper investors usually were real estate investors that like Jonathon Livingston Seagull had seen a better world. Like him, they had learned to soar, but that doesn’t mean he doesn’t eat like the other gulls.

I would never want to be without either form of investment. Especially, I would NEVER want to be without my knowledge of both. A real estate investor that does not learn about notes is one of the most short sighted of all people. A note investor that does not learn about real estate is truly sad.

So, like others pointed out, it’s a game of buy real estate, turn it into notes, buy notes, turn it into real estate, to turn into notes, to turn into real estate, etc. It goes on and on, profit all the way.

Someone remarked their enjoyment of created notes, but a concern that leverage doesn’t apply to notes. It does, notes are as easy to finance and easier than real estate. Its just a matter of different sources, different methods and different knowledge.

I entered into real estate investing in 1976 and note investing in 1977. At that time there was NO ONE that bought notes nationwide. There was no such thing as being a bird dog and brokering notes for pitiful commissions. I am SO GLAD about that. I don’t think I would have been sucked into the bird dog world. I don’t like to work like a dog for a bone and a pat on the head. Bird dogging for notes is so appropriately named as far as I am concerned. Ruff, Ruff.

I had to learn to work with private local investors. At first I only learned that notes were nice, but I liked real estate better. I learned to close more real estate deals by using notes. It became my most important tool. But, in 1980, my eyes were opened in a remarkable way to never close again. Ya, it feels like I haven’t slept since then.

I was just chatting by email with a friend a few days ago and reflecting on how I got into this, so instead of repeating it, I am going to just do a cut and paste here. Here’s my beginning.

Yes, it’s been interesting watching the change of the makeup of the industry. When I got into it note buyers were very experienced agents (usually exchangors), financial planners, attorneys and few others. Even the attorneys and CPA’s usually had their license and a good real estate background. These days the average note broker is incredibly un-trained regarding real estate or investment. I couldn’t imagine doing the industry without my real estate background or doing real estate without my paper background. But here we are. When I began, there really wasn’t such a thing as a note broker, just buyers. No commissions, referral fees, nothing. You just sold to one of the 4 or 5 people that bought in the local area. Marketing was almost non-existent. We had one of our buyers, Marshall #@@# (can’t remember anymore) that was rude, mean, cursed at you and violated every possible rule in the Carnegie book. Yet, if he was your best or only offer, you HAD to deal with him. When I began buying, I bought so much paper from people that were glad to deal with anyone buy him. I loved it. Always wanted to thank him. But, back then, you would deal for years without even meeting many of the handful of other people.

I was dabbling in it from 1977-1980, but couldn’t see the point. Paper was only a tool. Something to sell to make a real estate transaction come together or to get cash. 24% yield - baloney. No way I would invest for that little. I thought note buyers just didn’t know enough about real estate (unlike today where they really don’t). One of my top buyers - Lamont - kind of drove me nuts though. He was at every exchange meeting or educational event I went to, so he violated my theory. I don’t recall telling him I thought he was nuts to buy paper, but somehow he knew I felt that way. I went to the Creative Real Estate Expo 80 in Vegas with over 1500 other exchangors. I attended a 40 minute presentation by John Berven that talked about ways to make money with paper and particular how to buy at a discount and trade at face for property. I literally had a brain overload. It would have been a great video. I kind of stumbled out of the room and literally bumped into Lamont. He looked at the look on my face and laughed and said “Now you see why I buy paper”.

I had been buying millions in property, but it was hard work. All of a sudden to see I could buy at 60-80% of value for nothing down stunned me. And, in those days as much as 40-50% discount on notes was not unheard of. I came back and within weeks put together several hundred thousand in a note portfolio and started trading for property. As you probably know, it works if you know what you are doing and how to find the deals, negotiate, etc. Not the Joe Land baloney, the real deal. Land of course simplified, puffed, stretched and glamorized the concept to the point where it didn’t translate “from the podium to the pavement”.

But, once I put together the portfolio, learned how to find the properties, how to negotiate the deals - I set my agents loose. At first we’d go through a whole listing book to get a hundred or so leads. That led to ten offers and one closed. The average though was about a 40K profit and in 1980, that was enough to jump start my greed glands, though it took a month or more of hard work. But, I always refine and improve. Analyze and adjust. I got it to the point where it took about 9 leads to get three offers and three offers netted one deal. I had ten agents out writing offers all day long and my TRS-80 was flying along analyzing offers and burning up that 300 baud modem on the board’s new MLS computer.

Just the “Paper Trade” concept was enough to occupy me for the rest of my life, but I ran across Max Hollis and Carlos Royal’s book “Basic Steps of Private Money Financing and Discounted Mortgages” (or something close to that) and had a few more of what Wayne Palmer and I call “M.O.'s” (mental orgasms). He comes to mind because he gets such a kick out of the term and I love to bat his brain around from time to time and put him in overload with fun ideas. He bought his franchise from me in 1992 and I trained him in the business.

I read some of their concepts about playing with the terms of the note to increase the yield like “cut the rate in half and double the payment” to double your yield. That was the first time I had to look at my calculator and say “I trust you”, though it made no sense. That and some other ideas and John Berven’s two day seminar changed my brain forever.

End of the cut and paste.

So, I started with real estate, but kind of got sucked into note investing because it was a better and easier way to do real estate. Then over time, I just learned more and more about WHY to invest in paper and how to get incredible returns with none of my own money invested. I learned to work with private investors and small institutions for financing of 100% and more of my notes with a positive cash flow after.

Some bargains are real estate deals and some are note deals. You can turn management intensive real estate into simple cash flow notes. You can also use notes to get better real estate deals. David mentioned the “Paper Trade” scenario. That is one area where the real estate and note portfolio just grows and grows and grows. Each trade doubles the amount of notes. Each note trade ends up in a portfolio that can be improved over and over and over for continual profits. You could do ten of fifteen deals and retire off of the continually increasing cash flow.

Re: Best Cashflow Rentals or Notes/Paper??? - Posted by Anne_ND

Posted by Anne_ND on September 18, 2007 at 10:34:07:

Mark,

I started out in SFHs: rehab, rent and hold in an inexpensive market where I could buy for under $100K and rent for $650 to $1000.

I didn’t make enough money to retire until I started doing Lonnie deals (see Deals on Wheels, available here, if you are not familiar with the concept).

Now I buy MH-secured notes using investor funds. I keep the spread, and when the MHs turn over, I get to keep the new down payment or assignment fees. So my notes generate cashflow at a steady rate, but they also result in pretty regular “pops” of $1000 to $2000. Late fees also contribute to the increased cashflow.

On a work-to-cashflow basis, I’ve never found a better source of income.

If you know MHs, you can do this safely. The hardest part is finding the notes, and there are pretty straightforward ways to do this- networking is critical.

good luck,

Anne

YES - Posted by Jimmy

Posted by Jimmy on September 18, 2007 at 05:07:36:

cash flow can flow liberally from both. I am in both notes and rentals. Rentals came first, and the notes followed.

Rentals are a more sustainable business for me, because I need no net cash to grow the portfolio. I can say this, because I buy, rehab, refi and hold forever. When I do a 70% cash-out refi after a rehab, I almost always get all of my cash out, and usually more. and on my turf, rents are strong and resale values are low (by national standards). This formula equals SUSTAINABILITY and REPEATABILITY.

I haven’t found a way to grow a portfolio of notes using the same concept of leverage. My notes are self-created. Periodically, I harvest a well-positioned property, seller-finance it, and add it to the pile of paper.

The combination of rentals and paper is a good one. The paper is 100% yield, no expenses, but no appreciation potential. The properties offer a combo of yield and growth

At the moment, selling props is not a good idea in my market, but buying props is a great idea. So I am growing the rentals now. When my area becomes more favorable to sellers, I will harvest a few, and grow my note pile. I have no pressure either way, so I take what the market gives me.

Acquiring existing notes may be the next frontier for me. I’m not actively looking, but will, no doubt, stumble onto a portfolio of them at some point. Still have to figure out how to do this on a leveraged basis, so my cash is not bottled up in notes.

Re: Best Cashflow Rentals or Notes/Paper??? - Posted by John Behle

Posted by John Behle on September 17, 2007 at 13:58:14:

Actually, this page and forum is about note or paper investing instead of real estate. The term “Cash Flow Forum” can be a bit confusing, but the intent and content of the forum are about discounted mortgage investment and investment in other cash flows.

The question of which is better or what makes paper so appealing is a good one. Many of the people and hosts here actually started as real estate investors and have transitioned. In my case, that is what happened. I started as a very enthusiastic real estate investor, bought millions in property and became and education junky. The more I learned and the more I experienced, the more I was drawn to paper investment.

I have friends that started around the time I did and are still investing in property. We have discussions at times and some are hard to convince. I wrote an article many years ago contrasting the different types of investing. I called it “A Loanlord’s Lament”.

The article used to be posted here, but in some of the reformatting of the website it was lost. So, I will copy and paste here. That won’t make it as easily readable, so for a more readable format, you can go to http://www.papergame.com/article019.htm . Here is the article again below. You can read through this and then we can discuss more fully any questions you might have.

A “Loan-lord’s” Lament
(By John D. Behle)

OUCH! Honey, I got another paper cut. Can we buy an electric envelope opener? Also, please pick up some more deposit slips while you are out and some Grey Poupon.

Sure beats Landlording!

I remember the days of being a landlord (though a therapist would probably tell me to try to forget). Plunging toilets and chasing tenants around trying to get rent never was fun for me. Calls at three in the morning over leaky taps may be an exciting challenge for some people. A tenant rebuilding a Harley Davidson on the living room carpet might be no big deal for a tough, macho, hardened landlord, but I’d rather invest safer and more profitably.

No More 3:00 AM Calls!

I’ve never had a Mortgage call me at 3:00 am in the morning. I’ve never had a Trust Deed get in a fight with the Trust Deed upstairs. Land Contracts don’t lie to me. Mortgages don’t drive away in pickup trucks owing me money.

Loan-lording is Safer!

With a tenant, you have no collateral for what they owe you. You are effectively loaning money to someone specifically because they can’t afford it.

With a mortgage, they have their home as collateral and a strong interest in paying you.

Better than Triple-Net!

A tenant is not an owner. Much of the time, pride of ownership is lacking and they can beat a property to pieces. You are responsible for all major and most minor repairs.

An owner is responsible for all repairs and problems. The lender has a totally set payment and costs.

Price/ Rent Depreciation

In a market decline, a landlord’s equity can be wiped out with a 20% drop in prices. The lender’s equity takes priority.

The fair market rent can go down. Payments on mortgages are fixed.

Yield Appreciation

Sure, in an appreciating market, real estate values can go up. I’ll never be one to say it never makes sense to own real estate.

Mortgages can appreciate too.

When properties go up in value, refinancing increases. As that happens, payors are chasing you down and paying you off at full face value on notes.

That means that a $10,000 note that I might buy for $6,000 can end up paying off overnight for the full $10,000. A $100,000 mortgage bought for $60,000 pays off for a $40,000 profit.

I call that appreciation. I appreciate it every time it happens. It can happen in down markets too.

Also, when rents and values are going up, it is a good time to trigger some additional payments on the principle of the loan. I encourage payors to pay extra principle payments to pay the loan off much earlier and save thousands in interest.

Skyrocketing Yields!

When a payor on a note increases his payment, my yield may double. By the way, there are over a hundred ways to improve my profits on notes. They work in up, down or any market.

Nothing Down Notes!

The leverage possibilities with notes equal or exceed any other form of investment.

It is not only possible, but simple to invest in notes with 100% or more financing.

A Free Note

Using both private and institutional sources, I have routinely financed notes for more than the cost of my purchase. That could be a risky procedure in real estate, but not in notes.

I can finance a note 100% and have a cash flow when I am done. I can finance notes for as much as 200% of the cost of purchase and still have a cash flow in some cases.

Cash and a Cash Flow

Here’s a recent example from one of my students who now owns a franchise of National Note.

A property sold for $52,000 with $12,000 down. The $40,000 note was paid on for 7 years and then went into default.

The note was purchased for $10,000, restructured to $44,000 at 10% with a payment of $424.61 for 240 months.

200% of Cost

An investor loaned $20,000 against the note at 12% with a payment of $220.22 per month.

My student put almost $10,000 cash in his pocket and has a cash flow of over $200 per month for the next 20 years.

Most real estate investors take leverage for granted and don’t realize it is just as powerful when applied to other investments.

No tax advantages?

Could a totally tax free investment that doesn’t cost anything be considered a tax advantage?

IRA’s and pension funds can invest in notes. You could be receiving 14% or more interest and a compounding cash flow in your IRA.

$80,000 Free

You can even buy and sell notes in your IRA. Let’s look at a fun example of how to put $80,000 into an IRA for free.

Notes sell at a discount. If I bought a $50,000 note at a 16% yield, it would look like this.

$50,000 @ 10% $438.79 360 mo.

My Cost:

$32,630 @ 16% $438.79 360 mo.

If I purchased this note in an IRA and then sold off half of it at a 14% yield, I would receive the following.

$32,949 @ 14% $438.79 180 mo.

This would leave me with $319 more than it cost to buy the whole note and then payments of $438.79 per month for 15 years that begin in 15 years.

That totals over $80,000 in profit that didn’t cost a cent and is tax deferred until retirement.

I’m not saying don’t invest in real estate. I only suggest paper stacks up as well or better than most real estate.

Fewer Problems

Many of the standard problems real estate investors run into like property management, low cash flows, balloon payments and market price fluctuations are avoided or minimized by paper investment.

Retirement or financial independence can be summarized in two words - “Cash Flow”.

Buy A Cash Flow

Why invest time and energy in an investment that may take many years to create a safe cash flow when you could begin investing in the purchase of cash flows by buying paper.

Immediate cash flows that increase over time with little management! There is no need to wait 10 to 20 years to see equity and cash flow from your efforts. No need to be dependent upon the economy and real estate appreciation to profit from your investments.

In a future issue we will look more at the comparison between notes and real estate. A side by side 20 year investment proforma will be highlighted. You’ll see in black and white how paper stacks up.

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