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Money-Making Tips On Note Investing Straight From An Expert With Bob Malecki

August 18, 2021

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GDNI 165 Bob Malecki | Note Investing

 

Looking to expand your income stream with your first note investment venture? Look no further because today’s guest will share note investing and real estate knowledge to guide you before you decide on your next money-making move. Bob Malecki, the Managing Partner at Notable Capital Management, joins Jamie Bateman to impart his expertise on note investments. He shares everything from how he got his start to what he’s planning on investing in next. Bob gives valuable advice on how to stay on top of the game when it comes to choosing the right investment opportunities and where to find great sources of information. He also shares dos and don’ts for different market conditions and details which States to avoid for hassle-free and profitable investments. Gain relevant insights straight from an expert by tuning in on this episode!

Listen to the podcast here:

Money-Making Tips On Note Investing Straight From An Expert With Bob Malecki

Welcome everybody to another episode of the show. I’m joined by Bob Malecki, who has been in the real estate and note space for several years. Bob’s out on the West Coast, Seattle area, I believe. Bob, how are you doing?

I’m doing great, Jamie. Thanks for having me on. I’m located near Kingston, Washington, which is about three miles northwest of Seattle.

I imagine it’s beautiful out there.

We’ve got 70 degrees, going into the 80 degrees but sunny. The springs here are nice because we look at the mountains get covered with snow. They’re melted down but don’t ask me when it’s dark, cold and rainy.

Bob, for the readers who are unfamiliar with you, I know you were on the BiggerPockets Podcast years ago. For me, you’re an inspiration as far as getting into notes. You’re one of the first people who well-articulated the note space or explained it well and got me interested in notes, to be honest. I’ve been familiar with you for a while but many of our readers may not be as familiar with you. If you don’t mind, can you go over your background a little bit for us?

I came from Cleveland originally but I’ve traversed my way over to the West Coast in the late ’80s. I started in real estate investing in 2007. I had been running an internet company in the Seattle area. I sold the customer base and was still doing website development with a partner. I’ve got a techie background. Around 2006, my wife and I, both of our mothers died within a twelve-month period and left us money. We had some cash and we’re trying to decide how to invest it. I read Rich Dad Poor Dad. I was starting to catch up on real estate investing and figuring out what it was. Ironically, my father was a real estate salesman when I was a kid. I’d spend Sundays with him at open houses in the Cleveland area.

I’m familiar with that too. My father has been a realtor for many years. I can relate.

We decided real estate was the thing. We ended up buying a fourplex in Silverdale, Washington, which is about 30 miles away from where we live. A year later, we bought a duplex in Bremerton, Washington and became landlords. We figured things out. A few years later, I heard about this thing called flipping. I started to study how to flip a house. Then we got into the 2008, 2010 housing crash. There was a lot of good, low-priced inventory. I spent the next ten years in that aspect of flipping houses in the Seattle area, mostly in Kitsap County, where I live, which is across Puget Sound from Seattle. You’ll have to take a ferry from Puget Island to get to Seattle from where I live.

I did that. In 2012 maybe, I was attending the local REIA group meetings every month, watching all the presenters talk about their courses, go to the back of the room stuff and getting my knowledge together. This guy named Eddie Speed showed up and started talking about notes, buying distressed debt. I’m like, “What is that all about?” I got bored and left. I didn’t see the logic in it at all. It didn’t make sense to me. When you talk to a lot of real estate investors who are doing traditional rental holds or flips, they don’t understand what notes can do or the power of those.

About a year later, the realtor I’ve been working with who’s helping me resell my flips buys land with infrastructure and mobile homes, puts the home on the land and then sells it generally to a blue-collar worker at a good rate and all that. She found a couple in Washington that had sold their mobile home to another couple. They took back a note and wanted to sell their note. They were moving to the Southwest and retiring.

I got connected with them and offered them about $0.50 on the dollar. It was only a $14,000 note. It wasn’t a big acquisition but I bought the note at $0.50. When I did the math, I figured out on the P&I payments. I was getting a 40% return. I bought it in my IRA. It was tax-free. It’s a Roth IRA. I got the religion. Eddie came back to the REITs group in Seattle to do another presentation. That’s when I got it.

The fire was lit. I engaged in one of his weekend things where he and his group came into a hotel. We spent two days together learning about notes. That got me going. I met my partner, Kevin Moen, out there. Kevin had enrolled within notes school with Eddie and brought his mom along. He was trying to get his mom to learn notes, so forth and so on. Kevin and I got to know each other and that was good. I decided it was time to start a private equity fund.

There are all kinds of ways to invest in real estate but stay focused on one asset class at a time. Click To Tweet

I went to another weekend with Scott Carson at the time. I met my partner, Ben Cote, at that conference. Ben and I talked for about a year, off and on, on the phone. Long story short, I grouped up. Ben, Kevin and I started Resolution Capital Management to buy distressed first position notes and so forth. We’re winding that fund down because it was a five-year closed-ended fund. We’re selling our assets and dissolving the fund itself. We thought about starting another fund. We’re going to see a recession, I think fairly soon, but I don’t think it’s going to be like it was in 2008. There’s way too much equity in properties for there to be a big pile of distressed debt like there was.

I’ve been buying notes in that. I also partnered with Josh Andrews and Scott Ruzich to do the Notable Capital Fund. Ninety-five percent of the assets in the fund are junior second’s, mostly performing first. Josh is good at second position debt and doing the heavy lifting in that fund. That’s been a real joy as well. I found that working with partners over the years is great. I call it a three-legged stool. I do certain things good but I don’t do other certain things. Having two partners who complement my skills and capabilities works out well.

There are so many different ways we could go with this. You’ve got a real estate background. Within real estate investing, it sounds like you’ve done a bunch of different things, fix and flip, buy and hold. It sounds like you’ve worked for yourself for quite some time. When was the last time you had a boss?

1997, that’s when I left it. I was working for Adobe systems in Seattle. They sold off the product line and the department I worked to another company. They gave me the option of taking a severance or looking for another position in the company back in California. I lived in the Bay Area before I moved up to Seattle. I didn’t want to go back, especially the Silicon Valley and all that craziness, the hectic and the traffic. I took the pink slip and that’s when I started an internet company on Bainbridge Island in 1999. I’ve been self-employed for several years.

We’ve interviewed guests who’ve done many different parts. You invest in different asset classes or approach real estate and note investing from many different angles. I think one of the things, at least from my perspective, that sometimes may get lost is how much focus it takes or time devoted to one particular strategy. We had Fuquan Bilal on. He’s done his first, second real estate flips, notes, all kinds of things but this has been over decades. From your perspective, do you have anything to weigh in on that as far as how to approach different asset classes or strategies within real estate and notes?

Everybody’s probably heard of shiny object syndrome. It’s easy to get distracted. “What’s this? Maybe I should get into tax liens.” There are all kinds of ways to invest in real estate, as we know. What I figured out or at least determined for myself is staying focused on one asset class at a time if I can or maybe let them overlap. I was still flipping homes when I was buying notes. It was running in parallel to each other.

I also knew that as homes appreciated, as our economy got better, that flipping is going to start not being as lucrative. That’s one reason I got into notes. My standing joke as far as being a landlord, I want a tenant who will send me money and leave me alone and those are called borrowers. I figured out that I can create cash. I saw the value of mortgage notes being able to create cashflow with minimal management versus being a landlord.

There are tax differences. We all understand that owning a rental, you have a lot of tax deductions and so forth but the majority of the notes I own personally are in my IRA. That doesn’t matter at this point but staying focus, also keeping an eye on the future, looking at macro trends in the US economy and what’s going to happen possibly in 2 or 3 years. Real estate goes up and down in value. We’re trying to figure out where the peaks and valleys are and anticipate them through research.

I read a lot in the morning. I get a lot of newsfeeds and newsletters. My morning starts out after I take the dog out to the yard to come back in and have a cup of coffee. I have a little Android tablet. All I do is sit, read, go through my email, sort things out, get on newsletters, newsfeed and read what’s going on in the country and the world so I can keep a perspective in my little hovel of my home here. With my first company, I had five employees. We had an office and all that fun stuff.

I’ve decided I don’t want employees. I don’t like office politics. I’m not a good manager. I micromanage too much. I’ve learned that in my world, I’d rather work for myself and contract out or take on partners like I have. Having the internet and all of the online experience allows any of us to work anywhere in the world with anybody else. Two of my partners are in Seattle and San Francisco. The other two are in Austin, Texas. I’ve done JVs as probably as you have and Chris has with people all over the country.

I’ve read in one of your pre-interview answers that maybe you hadn’t met all of your partners in person. Chris and I have never met either while running a fund together. We announced that we’re opening a servicing company together but we’ve never met in person either. We plan to probably will very soon but it’s amazing what you can get done with Zoom and with the technology. Is that true that you haven’t met all of your partners?

Josh, Scott and I met. When they wanted to start the fund, they hired me as a consultant to help them design it. They came up to Seattle and we spent two days together. I also met Kevin and Ben, my other two partners but on my JVs, unless those partners came to a conference that I was attending, I might meet them at a conference. It’s interesting to get a call and go through the whole JV process, get together on a project through the phone and then go to a conference. They show up. You can sit down, have lunch and meeting them face-to-face.

GDNI 165 Bob Malecki | Note Investing

Note Investing: Keep an eye on the future and look at trends or macro trends in the US economy and what’s going to happen in two or possibly three years.

 

It’s an interesting thing. Having a good reputation for being a transparent, honest deal maker helps a lot. You think about it. When you have a joint venture partner who may be contributing $50,000 or $100,000 into a project and they’ve never met live, that’s a lot of trust for each other. We have our bad actors in the business that have not performed well and we know who they are. We try to spread the word to other people as to who you can trust and who you should trust.

Let’s be honest for the most part. The note space, in particular, is a fairly unregulated space. Therefore, we need to self-regulate and self-police. Your reputation is paramount to having success at least long-term. I couldn’t agree with that more. To circle back, I’m curious as far as your sources of information. I don’t know if this would be a good note and bolt to give the readers. We normally wait towards the end of the show. What types of outlets do you listen to or read as far as trying to gather information on the market conditions, economy and that kind of thing?

In our National Real Estate Investor, I think they have a once a week commercial newsletter they put out. They talk about the status of various sectors, which is great. On podcasts, I listen to real estate news briefs with Kathy Fettke. Kathy does a daily ten-minute overview of various aspects. She focuses mainly on residential, mostly on rentals and a lot of California news, which none of us care about maybe but she has good perspectives. It’s a good little newsfeed.

I also listen to podcasts on Amazon businesses and cryptocurrencies. That’s why I have a dog as I have an excuse to take the dog for a walk, put out for ten minutes to do something or the next twenty minutes to an hour. Generally, I sign up for a lot of newsletters. If it doesn’t have the content that I want, I just unsubscribe. I’m always trying to suck in information through reading, podcasts and getting on webinars. I try to record the webinar so I can watch it at my leisure or hopefully, they have a recorded version.

Once this COVID thing dies off, hopefully soon, I’ll start going to conferences. I find that’s a huge value for networking, finding partners and mentors, mentoring. It’s nice to be able to press the flesh. I don’t enjoy traveling as much anymore for obvious reasons. The airlines aren’t exactly comfortable anymore but to me, that’s a good resource as well.

You and I met in early 2018 at Paper Source. I was brand new to the note space but I can tell you that experience as a whole was valuable for me to get inspired and learn about all the different facets within the note space that people take. With a weekend like that, you’re not going to drill down into the weeds as far as how to run a note business per se but I think it’s just the networking and inspiration. There’s a lot of benefit to meeting in person if it’s safe. You touched on a little bit of where you are with both real estate and notes. What’s your portfolio? What’s the future look like?

In 2018, we sold our fourplex. It was cashflowing nicely and appreciating. My wife and I, our ambitions were to possibly purchase an apartment or flat in Europe somewhere, maybe in France or Spain and then Airbnb, have a place to live if we wanted to spend a month in Europe and travel around. We love to travel. Property values were going up and I thought, “I should probably put it on the market.” I did a bizbo for sale by owner. I’d put it on some lists locally in the Seattle area. We had a guy who was a retired fireman looked at it and then passed on it. Nine months later, he contacted me. He had a 1031 that he had to get done. He sold his other apartment.

When he needed a 1031, he couldn’t find anything. He ended up buying mine directly from me. I didn’t have to pay a broker their 6%. We sold it and got our cash out of it. We were going to go to Europe in May 2020 and then COVID hit. We had to cancel that whole thing. Hopefully, we’ll be able to go back out to Europe in 2022. We sold the fourplex. We still have our duplex. I refinanced that. I’m still buying notes off and on. I’m fairly well connected. Occasionally, I’ll get like a seller carryback a couple out of Boston. I had two seller carrybacks in Birmingham, Alabama. I bought the notes at a good discount from them. One of them is nonperforming. The other one is semi performing. I bought a note on a HECM. It’s a reverse mortgage where the borrower passed away.

I bought half a dozen of those a few years ago where we would either contact the heirs and they would sign over the deed to us or we just put pause because the borrower has passed away. The property is vacant. We went through six of those over the past few years. I bought this one near Euston. We’re foreclosing. I’ll probably put it on the market as an REO and sell it to an investor. Mostly, I have passive income from some of the JVs. Some of the JVs, we get a foreclose and resale.

We foreclosed on a property, one partner and I, in Oklahoma City in 2020. We’re going to sell it as is. I’ve got a realtor who I’ve been working with within that area for years. She had an investor who wanted to buy it from us. Fix it up and flip it. We did a seller carryback note for that flipper and we got paid back on that. She finally sold it. In the market anywhere, if you have a decent property, it’s going to sell quickly.

You mentioned several different states. Are there any other states that you over the years have either targeted or shied away from or is it more a matter of what comes your way?

The New Jersey, I’m not going to touch anything there for future periods. I don’t know the market very well anyway. In resolution capital, we bought a note in New Jersey. By the time, we got to take possession of it after years of waiting for the foreclosure. The neighborhood went down and the value of the property went down 40%. We lost money on that property. A good case in point, not to invest in New Jersey, unless you know the market well.

Real estate goes up and down in value. Try to figure out where the peaks and valleys are and anticipate them through research. Click To Tweet

I like Oklahoma, Tennessee, Carolinas, Texas. I’m staying out of California because of foreclosure and tenant laws. They are so consumer-friendly. It makes it difficult. Washington State is very similar too. I see occasional properties here or notes here. I foreclosed on a few properties in Washington State but a lot of the stuff that’s in the higher value markets like Washington or California are going to have a lot of heirs on them. There was a note I was looking at to purchase and then I realized the statute of limitations in Washington in six years. This note was beyond the statute of limitations. It would have been worthless. You got to look out like that. Ohio, I stay away from. I do like Michigan, Illinois, Indiana, mostly Midwest and Southeast.

One of the things that a lot of brand-new note investors underestimate is how state dependent this whole note space can be as far as the foreclosure timelines and costs. Most things in the note space are very much state dependent from what I’ve found.

We had a handful of notes in the notable fund in Pennsylvania and they have their licensing requirements. From what I understand, it’s a lot of work. You have to go to class. We’re selling those notes. We’re not going to get licensed. I have a note in Georgia. We got a three-note limit or something.

There’s a mortgage lender license. It depends on who you talk to. None of this is legal advice from Bob or me. I have read that as well, the three-note limit. The lender license in Georgia is not difficult to get necessarily but it’s expensive because you’ve got to get surety bond, which is required for the license. The license itself is $1,000 or $900 a year or something like that. Seek legal advice and all that but it can vary wildly based on the state as far as the laws go for sure. You’re winding down your one fund. Your fund with Josh, is that going strong still?

Yes. We’ve stopped taking on more capital because even in the second position space, it’s drying up. The good deals aren’t there anymore. I raised $500,000 in December 2020 into the fund and then Josh said, “I can’t deploy this. We should hand the money back.” It’s hard to give money back. We’re not going to sit on capital that’s not earning a return because it dissipates our other investors’ returns and the preferred. We’re sitting on what we have and redeeming some investors if they want to redeem, take their capital and do something else.

I’m sitting tight myself on note investing until I see where the post-COVID real estate market goes. Out here in the Seattle area, it’s crazy. I live on a hill and I’m four lots back from the Hood Canal, which is a waterway. There’s a house right below us with a view of the canal like we have. It’s 4,000 square foot home. They listed it for $999,000, which blew me away. It’s a big house. A $1 million house right next door to me is too crazy.

Hopefully, for you, that sells for over asking.

We’re not going anywhere. We put a new roof on the house, a new deck and windows. We’ll improve that house. I spent ten years improving other houses, flipping while my deck is running away and my room has a leak. After we sold the fourplex, we took some of that capital and put it back into our house. We got an air conditioner. In this part of the country, you don’t need it. It gets hot in August for a few weeks. You put up window fans. We ended up getting a heat pump. It was a good idea because we had 115-degree temperatures in Seattle. We had this weird once in 1,000-year heat wave came through.

I’m curious too. You mentioned joint ventures when you did your joint ventures. It sounds like you still have some ongoing. Do you do them on a per deal basis? If you could touch on how you’ve structured your joint ventures.

What I do is use a personal property trust framework. Notes are not real estate. You wouldn’t use a land trust. It’s personal property. I purchased a template system from an attorney out of Colorado. I can’t remember the guy’s name but he had a course on how to structure personal property trust, set up the trustee and the beneficiaries and then do addendums to change the beneficiary or the trustee. I learned all that about probably years ago. Each project has me or my self-directed IRA as a partner. My partner is either an entity, themselves or their IRA.

We then execute a joint venture agreement, essentially a partnership agreement. I had one written up by an attorney. It’s about fourteen pages. It covers what happens if one of us dies, if one of us wants to buy the other person have, how you’d evaluate the assets, that kind of a thing. We execute that. I set up a personal property trust for the actual asset, which would be a loan or a distressed debt mortgage. The beneficiaries are the two partners. How were they structured? I’ve been using my solo 401(k) as my partnership so I get my income tax free through the Roth component.

I set up a separate bank account. I get a federal EIN number under a trust. We have a taxable tax number. I go to the bank, set up a bank account, my local bank. The first few times, they didn’t understand what a personal property trust was. They thought it was a family trust and tried to drive me to their Trust Department. I said, “No.” It takes a while to get your bank educated. I like to use a local bank. I’m using my county bank. Not Bank of America, not a Big Five.

GDNI 165 Bob Malecki | Note Investing

Note Investing: Keep an eye out on HOAs if you’re going to buy notes in a condo situation in any state.

 

Once that’s set up, Ben, my partner, funds the deal. I put in at least $100 of my cash so that my IRA can legally invest in the deal. I’m using a platform called Insightly, which is similar to Podio and some of these others where I can put the deal on that platform, get my partner’s email contact in there. We can share information via Insightly. I can track the profitability of the income expense and all that. I have a virtual assistant who runs the Insightly platform for me. She also sets up a spreadsheet to track the income and expenses on the project.

I can share that on Google Drive with my partner so they can see at any time where I’ve spent the money where we’ve seen income. Assuming the project goes into a performing note, the principal and interest come into the bank account. Diana then posts that to the project. Every quarter I do a distribution where my partner gets 100% of the principal and 50% of the interest. My solo 401(k) gets the other 50% of the interest.

That’s more complicated maybe than some JVs, some people do. Seek legal advice. There’s nothing wrong with doing joint ventures. We’ve had maybe a little bit of interaction on one of the BiggerPockets forums where somebody asked, “Are joint ventures legal?” It’s like, “They’re legal if you do them legally and do them properly, whether it’s a nonperforming note or a fix and flip. It doesn’t matter.” I’ve heard a little bit from you before on how you do that but that’s interesting. When you say a project, is that one asset?

Yes. Keeping everything firewalled, in other words, don’t co-mingle different partners. I have separate bank accounts. I had literally twenty bank accounts, twenty separate JVs, twenty separate partners and twenty separate agreements. With technology, it’s not that hard to manage all of that. I’m down to about six JVs that are creating cashflow from performing notes. The rest of them were either foreclosed, sold, we dissolved it or whatever but it’s keeping everything separate. If you co-mingle and something goes sideways, securities regulations, that would be pretty much a no-no to do. You do it on a fund basis. I overdid it but I overdid it to make everything safe. Make sure their principal and their investment were covered and separated from everybody else’s.

Did you ever get into selling partials or anything like that or not so much?

My cousin, my wife and my IRA have partnered into an LLC and we’ve been buying notes in there. We talked about doing partials but we’re getting a good return on them. Why partial? We don’t need backward cash-rich because one of our loans paid off that we’ve had the portfolio for the past several years. We don’t need the cash. To me, partials, I understand them. I can see how they’ve worked but I don’t need to do them.

You’re hitting on one of the things I love about real estate. Everyone’s situation is different. Go with the approach that makes sense. If you’re cash-rich, why would you sell partials? It almost sounds like you would rather put that to work and have more cashflow as opposed to a larger lump sum of cash. That’s what I love about this whole space because you can be creative and solve whatever problem you have based on your circumstances. If you’re looking back on your real estate career, note career, small business, any of it, what would you say maybe 1 or 2 mistakes you’ve made that you’ve learned from or you could impart wisdom to our readers?

One thing I’ve learned is I’m not going to buy a note on a condo in Florida, especially in the Miami area. It’s a sharp pitch. We know a few investors who are big in Southern Florida, like Bill Bymel. I spoke to him a few times but I did buy a note on a condo in the Miami area a few years ago with a JV partner. It went very sideways. The problem was I didn’t realize that there was a mandatory country club fee when the property changes hands. The fee was $70,000. That destroyed the value of the property and the investment that we had in it.

The HOA fee was another $1,200 a month. It’s very expensive. The HOAs are happy to foreclose on their own condo so they can flip them out. You’re competing with the HOA sometimes. To me, it was too much of a snake pit. We did that at a loss. In JV, when we were splitting income and I’m getting profit, I also split losses. I had to kick in 50% of my self-directed money into the loss to get the thing answered. Keeping an eye out on HOAs. If you’re going to buy notes in a condo situation in any state, check HOA fees and country club fees, things like that. You might get blindsided on because you’re only used to single family homes and those things could impact you.

You’ve done a lot of things well but anything that comes to mind as far as your biggest strengths or successes?

One of the first notes we’ve purchased in our IRA LLC was on a little house in a suburb of Charlotte. This was probably in the first half a dozen notes, the first 2 or 3. The property value of the house at the time was maybe $35,000. It was a little two-bedroom, 1940s. It’s a 900 square foot house. We paid $13,500 for the note. It was already in foreclosure. Long story short, we worked with the borrower. We told them if he can come up with $10,000 down, we’ll modify his note, re-extend it for another 30 years, so and so.

He was trying to get us not to foreclose. He told us that the house had a sewer backup and all these great excuses. We held our ground. A week before the auction, he finally came to the table and wired in $10,000 into FCI. We put the foreclosure on hold. We ended up getting our capital back probably within eighteen months. We still have that note and the property is now worth $96,000. We’re getting cashflow for the past several years. We got 100% return. If he ever wants to stop paying us note, I’d be happy to foreclose on the house.

Keep everything firewalled. Don’t co-mingle different partners. Click To Tweet

Chris and I talked about what’s more important, buying at the right price or asset management. I don’t know if there’s a clear answer. If you overpay for a nonperforming note or any note, then you can’t asset manage your way out of that one but you also had to be patient, diligent and hold your ground, it sounds like with that deal.

Like that New Jersey note, if we would have kept it in the portfolio, maybe that property probably swung back up in value. I haven’t looked at what its value is. It’s being patient. Also, looking at trends and things. When I was flipping homes, I occasionally get into a situation of borrowing hard money at 1% a month payback. When you’re flipping a house, where do you set the price at? If you want to set it at the best highest price you can get works, you want to suck out all that equity but then if you price it too high, then it sits on the market for 60 or 90 days. In the meantime, you’re paying that 12% interest on the note and it’s eroding your profit.

It’s finding balances between what you pay for an asset, when you want to liquidate, what’s your long-term plan and have 2 or 3 exit strategies in place so that you’re not forced into exiting at a loss, particularly if you can. We could have kept the house in New Jersey, fixed it up and then sold it as a rental maybe or something too. There were other things but we just wanted to exit, get out what capital we could back out of it and redeploy the money.

You never know. You don’t have access to their results ahead of time. You can’t second guess too much. There’s an art and a science to it. The time, value of money and putting that capital back to work is a critical piece of thing if you’re looking at it from a portfolio perspective and not just one deal. It makes a lot of sense. You told me you’re working on Amazon Business. Did you want to briefly talk about that?

In 2020, we saw the trend that distressed debt is drying up. The stockpile of toxic assets has been cleaned up pretty much. Finding value and opportunity in the note space to me was starting to become more of a challenge. I have an IT background for the past years. I started to do some research on where do I want to invest in? What do I want to do? I realized that taking on an Amazon Business or selling on Amazon can be lucrative. Like any other industry, there are the gurus who tell you can make millions, all that stuff.

I ended up looking around. There are brokerages that will let owners of Amazon businesses sell their business. Most of these brokerages are high end. These companies are being sold for a multimillion dollar and have 3X or 4X annual net profit income. Those are out of my league but I did find a mom-and-pop business who has been on Amazon for ten years, which is good, a well-seasoned business. They sell pet supplies, collars, leashes, beds, carriers, that kind of thing.

They had it priced reasonably. I think they had it priced at about 1.5X of net profit, which tells me that I can recoup my money within 1 or 2 years or one and a half to two years. I went through my due diligence with them, made an offer and they accepted it. From June 2020, I paid them for the business. I took over their Amazon account. They had a web store as well, which I moved over to Shopify. I have a Shopify store in my Amazon Business. I hired a virtual assistant out of the Philippines. She handles my order processing and does some customer service. Mainly, she’s messaging through the Amazon system.

I’ve been doing that from 2020, as well as still buying some notes, co-running the fund with my partners and all that. It’s a little hectic sometimes but with resolution capital winding down and notable capital settling in, I have more time dedicate. I bought another Amazon Business and I have a seller. It’s a guy in Austria. He’s Romanian but lives in Austria with his wife and daughter. He built a one product Amazon Business. He sells silicone 14 by 20 mats with tall lifts that you put your pet food bowl on. It keeps the spilling over to get on your carpet or your hardwood floor. It’s $14 but he’s doing well. He wants to sell it. I’m buying it. I’m going to add it to our product line.

What’s the name of your business?

On Amazon, it’s South Paw Pet Supply. My Shopify store is TheLuckyDog.store.

I don’t know if this is true but it seems like you timed it well with COVID. I saw some articles about the number of pets increasing for sure. Is that true?

It’s true. It was a good year. I was also reading articles that the shelters are getting a lot of pets because people are going back to work. It’s sad to see them having to turn that skin. Business is still strong. It’s interesting to see that I started to get a lot of orders for pet carriers. I’m going, “Everybody’s going to be traveling for Christmas.” We sell a pet vest that has straps in the back. You can run a seatbelt through it so you can keep your pet safe in your car. Those are popular because people are driving again. It’s interesting to see these trends happening in this little niche.

GDNI 165 Bob Malecki | Note Investing

Note Investing: Find balances between what you pay for an asset when you want to liquidate, what’s your long-term plan and have two or three exit strategies in place so that you’re not forced into exiting at a loss.

 

There are many takeaways from this interview. One for me is you focused on one thing at a time but then you’ve developed expertise across many different niches and asset classes. You’re also paying attention to market trends and the big picture. None of us can predict what’s going to happen exactly but when it does happen, you’re going to see maybe some signs and then be able to pivot and fall back on one of your strengths or something that you’ve been learning over the last few years. I love the growth mindset. There are lots of key takeaways that our readers are going to get a lot of value out of this but is there anything else you want to mention or anything that comes to mind?

I’ve been looking at other opportunities. I started to latch into buying music royalties. There’s a couple of brokerages that sell music royalties. It’s mostly rappers and bands I’ve never heard of. The way that music royalties work is the artist gets a certain percentage over the life of the music, the album, the song, whatever it is. Typically, in the first two years, they get 75% of the income off the royalty and then it tapers down. A lot of times, they’ll want to sell you that have lifetime rights from that period going forward or maybe the next ten years. They want to get that cash out. These brokerages are selling royalties. You get paid directly from EMI or wherever the music publisher is.

It’s pure passive income, which is an interesting model. It equates to about a 10% annualized return. I’m going to buying notes and making 20%, 30% sometimes, although it is totally passive. You’re just getting checks. You don’t have to lift a finger but it’s fascinating to see how people are bidding on music royalties and all that. I’m going over your investment things but I still like real estate the best. My goal with my Amazon Business is to increase the cashflow and the net profit over the next few years, try to sell it for a higher multiple and exit. Then we’ll have other opportunities in real estate.

Does your wife get involved in any of these strategies?

No. She understands exactly what I do but I bounce ideas off to her. “What do you think of this?” We work together in terms of conceptualizing and planning but she doesn’t have the patience that I do for the business aspects of things.

We can talk about investing and notes but the reality is there’s usually some family or home dynamic. Chris’s wife, for example, we joke that it’s a little hobby he does in the basement but meanwhile, he’s got a portfolio of 300 notes or something like that and a full-time job. My wife and I do some real estate stuff together but she was helping me a lot with our note business. She’s not doing that so much anymore but every situation is different. I was curious.

The rule of thumb for me is having a spouse who is understanding, patient and can roll with the environment. When I was flipping houses, there were a few years where we were not doing well financially. I was over leveraged. We were cutting back on a lot of stuff. My wife, Suzanne hung in there with me. She’s been self-employed for twenty years herself. She knows the facets but having that up and down in terms of cashflow and sticking together through the lean times, it’s important that your partner understands that there’s risk there. Trust me that I can mitigate the risk and make us money but if I screw up or if I miscalculate, don’t walk out the door. Stick with me.

It’s easy to talk about the wins and the glory days but there are ups and downs with any small business or investing venture. If you know that going in, you don’t necessarily know what it’s going to look like exactly but you realized, “I knew that there were going to be some hard times and here we are.”

It depends on too. A lot of investors have a spouse who works full-time. They bring in the mortgage money and the food money while all the other take some risks and maybe don’t make as much money but for us, we’re both self-employed.

Bob, this has been great. I appreciate you joining us. I know our readers are going to get a lot of value from this. Where can our readers reach out if they want to reach out to you?

It’s probably through Notable, Bob@NotableFund.com. That would be a place to go. I’m on Facebook and LinkedIn as well under Bob Malecki. Feel free to reach out to me. In BiggerPockets, although the traffic is going through BiggerPockets, I’ve noticed down quite a bit.

I’ve been less active myself but it seems to be a little less active. I also got my wrist slapped for self-promotion or something. I think you’ve had that before.

The value of notes is being able to create cash flow with minimal management. Click To Tweet

I got suspended three times.

I think you told me that when we met in 2018.

They’re very strict on that stuff. The second suspension was how I got a hold of the owners with two guys. I can’t remember their name and that’s how I got interviewed by them.

Something good came out of it. That’s good. Thank you very much once again, Bob. This has been great. I appreciate it. I know our readers are going to get a ton of value. Thanks a lot for joining us.

You’re welcome.

For our readers out there, feel free to give us a positive review. Go out and do some good deeds. Thanks, everyone.

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About Bob Malecki

Bob Malecki is a professional real estate investor located in Kingston Washington, about 30 miles west of Seattle. Since 2006, Bob has been involved with the acquisition and management of distressed real estate assets including non-performing notes and single/multi-family properties in key markets in the U.S. His fund management experience includes the creation and management of multiple private equity funds, including Resolution Capital Management LLC which manages a series of private equity funds designed to acquire senior distressed residential mortgage debt, and more recently the Notable Capital Fund where he will be responsible for compliance guidance, business development and operational oversight.

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