Welcome to Cleveland real estate investor. On this podcast, you'll hear about every aspect of the real estate investment business. You will talk to your rockstar investors about their businesses, how they built them, where they came from, and where they're going. Who am I? I'm Joe Lieber and I've made millions of dollars from the real estate investment business over the last 20 years. If you're ready to hear the good and bad from a guy who's learned this business from the school of hard knocks and get educated by some bad ass entrepreneurs, then put your helmet on, strap on your chin strap. Let's ride.
(00:54): Hey everybody. Thank you for tuning in. I have a special treat today. My dear friend, mr. Eddie speed at Dallas, Texas. How are you? Eddie? I'm good, Joe, how are you? Oh, thanks so much. I am truly humbled and honored to have you on the show today. Eddie is a great friend, great mentor. He is incredibly knowledgeable when it comes to well, it really everything but seller finance, creative financing is his wheelhouse. And I wanted to bring Eddie on today to talk to us about something very near and dear to me, which is rental properties. We all know I have a bunch of them. I've had them for years. I enjoy the cash flow, but Eddie and I have had many, many conversations over many cocktails in some of the best places in the world. Talking about the difference between rental properties and note investing and ready just recently did a private Al's call it podcast for members of our mastermind, talking about the differences and the pros and cons.
(01:59): And I just wanted to bring you on to give some of the cliff notes today about rental property investing versus investing in notes. So welcome to the show, Eddie, thanks for being here. And talk to me, my friend. Talk to me about all the good stuff. You're a wealth of knowledge. Well, I really appreciate that and I appreciate your kind words. And I would say all that back to you, right? You're a veteran in the business and a good operator, right? You're not just knowledgeable, but you're, you're a straight shooter. You care about your clients and all that's reflected in the style of doing business and that's the people I want to do business with. Thank you. So I think Joe, I think there's rental cycles and I think there's note cycles, right? And I don't think it's always defined and there'll always be more rentals than there are people that decide they want to owner finance because rental properties are on. You could ask anybody at the movie theater with a driver's
(03:00): License and they know what a rent house is. Right? You go to the movie theater, you go in a restaurant, everybody in there knows what our rental house is. Very few people know what seller financing is. So it's just not as well known. It doesn't mean that it's worse. It just means it's not as well known. And so people are gonna opt to those situations for that reason. But 2008 comes along, you guys got clobbered, right? Yeah. Really clobbered. Right. And I own more assets in Ohio today than I own in the state of Texas. Right. And I have owned more assets in Ohio for the last eight years. Right. Okay. So I've invested and a lot of seller financed notes that were generated in Ohio and Michigan and Indiana and so forth and so on. Right? So the reason I could buy Ohio assets is because I could pay less for Ohio assets than I paid for assets in Texas or Texas notes, the same quality, the same grade level of, you know, investment grade, as we would look at it, that note in Texas might cost me 90, 92 cents in Ohio. It might cost me 78 to 80 cents. Okay. So ask why I bought a lot of Ohio assets and I know a fair amount about it. And I have a lot of ties up there, obviously friends like you. And just a lot of people that I've been very connected with. So it's not like I'm like completely a foreigner to that asset class.
(04:39): So Eddie, just for our listeners. So they understand that seller finance note, these are folks where they have seller financed someone at up a single family home, preferably is your asset class. Correct. And then they want to cash out. They want, they need and want their money. And you come in and you buy that piece of paper at a distance.
(04:57): Yup. Okay. So we would buy, I bought 50,000 notes. Alright. And then I bought so many notes is because I targeted people like you that were real estate investors, not, I bought a lot of mom and pop notes, just one note, one person. And then they'll ever own another note that you can't get my 50,000 of those right now. I can go find somebody like Joe, that has a hundred notes and I can go buy those notes. And that's where I put up big numbers. I developed the note system for home investors back in the early nineties. Most people that have done any significant volume of notes. It's a very small world business. But most of them know of us. My executive team's bought three and a half billion dollars in seller finance notes. Now the guys that run my shop are from Bayview and metropolitan and associates.
(05:47): So when you start looking back in the history, you start realizing the people that were in my shop were running those shops back then. And they had big institutional money, right? So they bought lot of these notes. So why are we entering a note cycle? Okay. So Joe 86% of all residential, single family doors now not just single family, residential doors, it could be a fourplex. Okay. 86% of those investors. And this is data. I've got tons of information on it, but we gather all this data all the time is owned by a guy that owns one to five units. 70% of those Joe 70% are self-managed. Wow. Okay. Now what they fought is they were buying an investment. What they now discovered is they bought a job, right? So when people say there's no real estate, there's no inventory. I'm like, Whoa, Whoa, Whoa, Whoa.
(06:53): There's some pent up inventory. That's pretty amazing. With 7 million people that didn't make a mortgage payment this month. That's a lot. That's a lot. Half of them are in forbearance and half of them are just flattened delinquent. This is just residential. Now we're not talking about commercial. That's a whole nother story. Right? So that's shadow inventory, right? We have 18 million more rental properties than we did 10 years ago, dominated by amateurs, not by professionals. Your industry is dominated by people that do not have your level of competence. I absolutely agree. Very competent. Right? You're very seasoned. You're in people that you manage for and you sell to, and all that stuff are dealing with somebody that is a proven track record investor. But the truth of matter is that the people that own the rent house, two doors down from yours, they're not at your level of competence, right?
(07:50): Yeah. They own the same asset. Right. They all have the same asset class. And so I believe that we are going to see a flat in value because we have such a pinup inventory. Now that seems crazy at the moment. I fully understand the old man is crazy. Okay. Because you're like, you don't understand, we put a house on the market, we get like eight offers over the weekend. Right, right. But it's hard to deny the shadow inventory that I'm describing. Of course you have all the data and the data is what talks. Here's an interesting data fact. Okay. And you're not going to say this is anything close to what you've experienced. Cause I know you're in collective genius mastermind, just like I am. And the LOE bang collective genius that has anywhere near the slippage and payments. But data sources say legitimate data sources say that landlords have experienced a 35% slippage in collecting rent.
(08:51): Wow. Now listen, you and I know people that will just kind of scoff at that. They're like, yeah, I know they print that stuff, but that's ridiculous. And that's not true. And, and whatever, I don't know what the number is. The data source that gathers is it's a software company that sells software to small landlords. That's how they gather the data. They probably actually know. Right. I know that's not your slippage. And I know that's not any, anybody that I know that's a really top professional operator in the turnkey space. I know that's not your slippage, but you also have a vetting system. Absolutely. A very good one. Okay. Well what vetting system do they have? Not the ones that I have. I don't think so. Understand. I think this is an issue. And that fact that if we're looking at the market, then why would somebody seller finance? So Joe, here's my appeal to you. You got a nice single family house. It's worth a hundred grand. You owe 50, you have $50,000 in equity and $50,000 in debt. If I might be right, you could owner finance your way out of it. You can take your $50,000 in equity and earn interest on it and earn more income and keeping as a rental.
(10:05): Take me through those numbers. I love this. This is, this is where it gets interesting. So I have a lot of folks in this situation, including myself. So take me through some numbers then.
(10:13): So if you're in Phoenix, I would've picked 200. If you're in Cleveland, I'm gonna pick a hundred fair number. Okay. Nice house. Nice neighborhood. It's not junk. You decide to owner finance it. You can get 20% down.
(10:29):
Okay. Okay. To an O who is my who's my buyer. It's owner occupant. Yeah.
(10:32): Buyer Joe 35% of the people that could get a mortgage in February. Can't get one today. There ain't no shortage of people that want to buy a house and a reasonably qualified. Right? We have a mortgage crisis that is not been in the press. It's called mortgage credit availability, mortgage bankers association. You can go Google all this stuff. I mean, it's in mind do their own research. I'm just giving you the benefit of some summary of research. The average down payment. Let's just say for September, October, right? Okay. The average down payment is 16% that somebody is paying. According to Ellie Mae, average down payment, somebody who's paying to get a conventional mortgage. So this thing of, Oh, everybody gets in for 5%. Now. That's just not true. It's just not fat. Right? Ellie Mae is a software company that gathers all the data for all the conventional loan patients in the country. These are deep data sources, very reliable data sources. Okay. So what I'm saying to you is Joe that the 35% of the people that can't get a mortgage today that could in February plus the other people that just weren't bankable to start with. It's not because they have bad credit. It's not because they don't have anything down. It's not because they have a quote, sad story. These are deserving buyers that owner financing can fill a gap. Okay.
(11:57): I'm with you. So I'm going to get 20% down.
(12:01): So in a hundred thousand dollars sales price, you get 20% down. You get 20,000, right? Okay. Now your remaining investment is 30,000. Your equity because you got 20,000 back, you start collecting payments on that. You get more cash flow from that $80,000 loan than you did from the hundred thousand dollar rental. Just pure math.
(12:30): I don't have, I have to get my calculator ready? Hold on one second.
(12:34): You know, this is, this is live and in person, would you say this right now? That's how you do it. You seem to be running like a dog
(12:45): Right now. I give an $80,000 note. I'm originating. What are my terms? I'm originating.
(12:51): Well, you're going to probably originate it between seven and 9% interest. Alright, let's go on.
(12:56): Hi. So I like 9:00 AM I doing a 30 year, term 30. All right. So I've got a P and I payment of six 43 a month.
(13:04): Yeah. Now you may have an underlying debt. You may wrap it and there's some ways to do it safely and there's some ways to do it high risk. Right. So we can have that conversation. It's very doable to do it in a way that's not risky because I, you structure it. So let's just say you're collecting 700 a month and you have an underlying mortgage payment on your 50,000 of, I don't know, three 50. Okay. Fair. That gives you $350 net income, correct? I put 20,000 in your pocket cash. Correct. Does this house, was it making you three 50 net income net income before then?
(13:44): Well, here's the wild card. I have all of the maintenance. I have all the vacancy risk. I have all the turnover risk. I have property management expense. So I'm going to say the rent. I could get on the assets a thousand dollars a month. And we set my underlying notice three 50, but I have taxes. I have insurance. I have all these whole costs. I mean, it might be a wall,
(14:08): Correct? Yeah. So the wash understand that this is how you monetize a market situation with awareness. Right? You now understand that the mortgage industry has drastically cut back in anticipation of a bomb that the real estate brokerage industry hasn't experienced yet. I call it crash in slow motion, right? Yeah. And we can debate about whether it's true in the shadow and we can have all these debates. I will say Warren buffet is not sitting on $130 billion today in cash because he thinks everything's going to be all good on the other side. Of course. Yeah. He's getting ready
(14:52): For something.
(14:52): So understand that. I think my bet is fairly close to how big money is betting. Right? Okay. A high volume guy that I was an event last week and he's a legitimate guy, you know, and stuff. And he's Eddie. I just think you're confused. He said, you know, all these rental properties go on the market. And he said, I'm not denying anything you're saying, but he said, wall street is going to gobble them up. And I started laughing and I said, there ain't no way.
(15:19): No, I don't believe that either
(15:21): Acid wall street came into the market because they can buy cheap and ride the market up, ride the lift in value. Right. That's why they did it. And that's why you saw them tail off a lot. And around 2015, you remember that everybody was sitting on the wall street, you know, and then all of a sudden it tailed off. And then all of a sudden the new guy is the HGTV guy. Right? Yup. That's who all the wholesalers sell to is the HGTV guy. Yup. But the HGTV guy has to get financing. He's not made of cash. No, he's not. Okay. Well, let me just tell you something. The rental market financing market is shrinking pretty drastically.
(16:01): I believe that. Okay. So
(16:03): I have to be careful that I don't come off. Like it's, I'm just here telling you this terrible news, right? No, not at all. I have to look at it and say, if I don't understand what's happening in the market, I can't accurately project exactly how I'm going to take an angle on it. Right. My angle is pretty simple. I've been in the seller finance business since 1980 that's 40 years time. But I have built a lot in property. I've sold thousands of properties. I like seller financing, but not always exclusively seller financing. But I just think that if we look at I've had a say in for a long time, seller financing fills the void, that conventional lending doesn't, that's a great thing. It's true. That's true. Then where is there a big void? And the void is this so many people that would have normally been able to get a mortgage and I'm to say, they're all the 35% that can't get a mortgage. We'll all agree. Some of them just, they're not a risk. We should take it. All right. So, but gosh, Joe, if we could only sell or finance, 10% of those people, the mortgage industry is left behind. You realize how, what a pool of buyers that he is. It's a crazy number,
(17:16): Crazy number. So you think just, okay, so rental property investing. I mean, I'm with you. There's no such thing as a passive passive rental property, it's an active, passive investment. So you think in order to, Inverb avoid the ups and downs and the topsy turvy, you think it's much safer investments to invest in notes, opposed to investing in rental properties,
(17:37): Timing, timing's everything. I would have never told you not to buy rentals in 2014, that would have been foolish, right? When you got a heck of a lift in value, the market's been very kind to you. Very kind. And I totally get that. And I think you're a great operator. You work the business well, but your timing was good. And that was because you were operating with good information, right. You're asking me where the next chapter leads. And I believe the next chapter leads to a better story for a lot of people. I don't want to say for everybody in every property, that would be ridiculous. Right. Right. But if you wanted to reposition yourself, you could strongly reposition yourself right now with selling, getting significant money. Right, right down. And then financing part of your equity that produces a real cash flow. And man, you're, you're rolling.
(18:32): You are rolling. Let me ask you this question. If I were to do that and sell a house that I've a paid $25,000 for when I sell it for a hundred Boqueria note, am I required to pay the tax liability on a hundred thousand? Like I sold it.
(18:45): Well, I'm going to be the first to say that I'm very familiar with the concept of Phantom income. Right. And what you're asking me is Phantom income, which is, can I do an installment sale basis? Right. Okay. So first of all, you cannot mix your rentals with your fix and flip business. Okay? Correct. Because you have to have it in an entity or move it to an entity that is clearly in the long term business. Or there are a number of strategies at a much deeper conversation. Then we're going to be able to have today because there's a lot of variables that would go into this answer. Sure. There are ways to position it, to take long term installment income from that asset, there are ways to do it. It may involve moving them to another entity. It may be some other things. There may be some other ways too, that you need to structure it, but I'll promise you.
(19:38): I know how to do it. Oh, there's no doubt. And it can be done in different ways. And no, I'm not a tax advisor, but I am enough aware of this. I'm not doing something that's going to put you in an inordinate risk with, you know, a tax situation. So there, I think you would probably call me a conservative guy, right? So I'm not doing something that's high risk or dangerous in that regard, you would need to be strategic, just don't go out and do it and call your accountant and say, Hey, here's what I did. I would not do that. And your accountant probably is going to need to have some specific guidance. Cause this is not something that most accountants are really what I would say extremely formal.
(20:22): Sure. And I love Eddie that you have so many notes in Ohio. It makes me feel like I'm in one of the hottest real estate markets in the country. Good old Cleveland, Ohio area. It's unbelievable.
(20:31): Now we've gosh, we've had, we've bought around 6,000 seller financed notes in the past, probably four and a half years. Wow. And I think Ohio is our number one state. I think we bought 900 in Ohio. 800 assets a lot. Yeah.
(20:50): There's a wonderful opportunity here. There really is. I noticed this high level, this note stuff, but it's a new way to get the folks that buy turnkey for me. I like to get their mind thinking in other directions as well. You know, if they're looking to exit something, exit it through owner financing, still being able to, you know, basically control the asset through a mortgage and relieve themselves of all those burdens of those service calls and property managers.
(21:14): Well, it's, it's an alternative. It's not saying that you, you turn everything into this, but it's saying it's certainly an alternative. We sell about probably 800 to a thousand notes a year with an average seasoning, meaning they've been making their payments for probably an average of about seven years. So before we sell it to a private investor, we're selling a loan that already has been paying for seven years.
(21:39): So if I have a listener said, he, that say, man, this is interesting. How do I contact Eddie to talk about it? Buying some of this paper? I have some passive investors. I got a lot of surgeons that listen to this podcast and you know, high level attorneys and doctors and some,
(21:55): I do it that way. I'm going to do the thing that you should never do, but I'm going to do it anyway. Right? I'm going to give you two sources. If you think you're ready to go, just step up and look at assets. We own a trade platform called notes, direct.com. Okay. We have on any given day between 102 hundred assets, we've been doing this for years and these are primarily assets that we own. So they are deliverable. You're not going to some website and poking the buy button and finding out they don't really have the stuff behind the scenes. So notes direct.com, right? There's a vetting process. You know where we're going to make you sign a nondisclosure agreement. So we don't end up with these notes on the internet or some silly that's like that, but that's for already somebody that's really do it.
(22:37): And then if we're going to just go learn more about what the thought process and notes and what's possible with notes, then you're going to go to note, school.com, grow wealth. And then we'll give you the lack of the white paper and put you through a little class and give you shit. We like to teach you a case studies, right? So, because it's solid and we'll put you through that stuff. And then, you know, you can then decide where you want to go. You want to go learn more. You do it, you know, enough, you know, you can figure it out,
(23:07): Guys. Eddie's information out there that he has is unbelievable. It is. It's amazing. The things that Eddie has out there to educate you. And I highly recommend it. I've seen a lot of his stuff. I've spent a lot of time with Eddie. This is a great business guys. This is something that I will ultimately do is just be on the paper side of the business at some point. So I know all you cats out there. They'll follow me. And I have all these rental properties that we all know that at some point as I get a little older things change and bit on that, I will sell those properties. And BA a note investor. It takes a little time to get there, but I really think you guys should look into Eddie speed. Eddie. Is there anything else you want to add to
(23:46): That I didn't touch on or to let the listeners know about you or sell a credit seller financing? We've always taken a position that we want to be give good solid information for real estate investors to kind of know data and facts. It's kind of hard for real estate investors to get real data and facts and information. So we have a bunch of mortgage banker type guys around my shop and they like doing it. It's kind of their hobby. So to speak. I mean, they just really liked doing them. So we're always trying to give you good information. That way you can make good decisions and you can do this as an alternative. This definitely would tie in with how somebody could blend a rental portfolio. When you, you to Joe. I mean, it would be something you can do and diversify. You don't have to go dump everything and go do this, but it's definitely some ideas and I'm, well, your listeners are in a good position because I have a good operator they're listening to.
(24:43): Right. I appreciate you saying that, Eddie. Thank you. I try really hard to be good operator. So it makes a good name for our business. So I hear a lot of people that don't really know because they haven't quite been there yet. But I would tell you that dealing with a solid operator with a long measurable track record, that's a litmus test. You sure want to make sure you have no, I completely agree. Cool, mr. Eddie speed. Thank you. Thank you for your time today. I'm incredibly honored to have you on the show and we'll be sure to put your websites in our show notes. So anyone that wants to reach out to you and learn more about it or buy some paper, they know how to reach you. I look forward to that. Thank you, Joe. Thank you, Eddie. I appreciate you. Alright.
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