E318 | Then vs. Now: What’s Changed in Note Investing—and Smart Ways to Start Today

Welcome back everybody, to the Papertrail podcast.

Today I'm going to talk about an interesting topic that was brought up to me by somebody in my membership group and they asked the difference between note investing back when I started versus now, and if somebody was just getting started, what would I do differently or how are things different?

Because I started almost 10 years ago, it was a very different landscape and environment than it is today.

So I want to really focus on and talk about that because it's a great question and I think a lot of people are wondering about this and they're asking themselves, so how do I even get started today?

So on today's episode, we will talk about what has changed in the note space over the past decade, how you can get started in today's market, and what to do if you don't have all the funds to buy a loan yourself.

So let's roll right into it and let's dive in.

So to tee this off, let's start about then versus now.

And when I got started note investing, the landscape was very different.

There was a lot more availability, especially of smaller balance loans.

Think unpaid balances of 20 to $50,000, sometimes even less.

And these were ideal for newer investors looking at started with relatively low capital.

Now why was that?

The bank's hedge funds still, you know, sitting on piles of distressed paper.

They were selling off all these REOs and companies were buying them and doing seller finance by what was called a contract for deed.

And I've done plenty of episodes on what a contract for deed is.

You can go back and check, but think of it like a car where when you buy a car, you hold title.

I'm sorry, the lender still holds title until you pay it off.

Similar in a contract for deed where the lender still holds title until you pay it off, compared to a mortgage where you hold title to that property.

Now, today, most of that legacy paper has either been resolved, refinanced, or, you know, not really available.

And what we're seeing are generally larger balance loans with higher price tags and more competition for those quality assets.

But, and this is key, the opportunity has not disappeared, it's, I'd say evolved.

Because today we've got better tools, there's more vendors, there's different compliance infrastructure.

I look at it as a more mature market.

And because of that, people realize the value of these assets.

And back in the day when I was able to buy them at 30, 40 cents on the dollar, that's not the case anymore because the value at that time, they were worth a lot more than that.

But sellers just wanted to liquidate, especially funds that were closing.

So the inventory, the space we met, it's changed.

And because of it, how I get started is going to be very different than how you would want to get started in today's markets.

So I put together kind of a five step framework for investors and how, what should I do?

I heard about Node Investing.

How do I get involved?

What should I do?

First thing, educate yourself.

Start by learning the basics.

When I got started, I did not know the difference between a mortgage and a note.

It took me forever to understand the differences between an assignment and a launch.

I kept getting them confused.

It was almost like when I was a kid learning like left, right, left, right, where you're like, you know, using your hand and you know, I don't remember they had this, you know, to tell you which was left.

My parents, you know, forgot to tell me that one.

So I remember just sitting there going left, right, left, right.

Same thing with a launch and assignment, like which one's, which, which one goes with the note, which one goes to the mortgage.

I really struggled with the paperwork behind it.

Real estate I was good at because I had been in real estate.

But understanding the terminology and everything was very challenging.

Some of the other basics, the difference between performing and non performing notes, understanding the risks, understanding judicial versus non judicial states, understanding how time can impact your valuations.

And as part of educating yourself, there's plenty of free information on YouTube, the Internet.

There's also a lot of gurus out there who charge a lot of money and some of them actually have okay training.

But be careful before sending them any money because there's a lot of them who have criminal histories that rap sheets that go on for pages and encyclopedia thickness type pages.

And as always, we do provide beginner friendly resources, guides, glossaries, head over 70investments.com, happy to provide that to you.

Second step is being yourself, being unique.

Define your own strategy.

What works for you, what works for you or what works for me may not work for you.

Do you want monthly income?

Do you want which is typically a performing loan?

Or are you looking for something non performing, little higher risk, low, high reward, you know, is it something that you're looking to hold for long term, you looking to sell?

A lot of decisions can shape that approach and your risk tolerance.

And a lot of it also will go to how much money do you have?

Are you buying a first or a second?

Again, all of this needs to kind of be glossed over and just reviewed.

I spent a good six months before I've bought my first note and I thought that was a good amount of time.

I thought I probably got a little bit analysis paralysis.

But I still know investors from when I started who've only bought one note because of analysis paralysis.

So they're on like almost a decade of analysis paralysis, which I don't think is healthy.

The other is building your team.

And you're going to need a solid team around you, your servicers, your attorneys, where you get your titles, title searches, all of that.

And I'll tell you, do not burn bridges.

It's a very small business.

So speak to them, understand their timing and hold their feet to the fire.

But if they screw up, you know, don't blast them on social media, you know, just try and work with them.

Here's where I think everyone may.

Here's where I think a lot of people on the next step make the biggest mistake.

This is sourcing inventory.

And I like to think about this as I got many things wrong in my mind.

But you'll reach out to see brokers, hedge funds, trading platforms like Paper Stack and or other funds like people reach out to us for assets.

What I will tell you is quality over quantity.

It's great that you're getting all of this quantity of loans.

Now we see over a billion a month.

I see a billion plus from one seller.

I have actually bid the same amount with that seller and another seller who was brokering the same asset and I win it from the other seller.

I actually bid higher one time on this other seller and still won it with a lower bid on the other one.

Why?

Because this other seller is more challenging, difficult and they want to charge higher fees to, you know, on the back end.

But it's cool that I can say whippedy.

Do I get a billion dollars?

I can't buy a billion, not even come close to that.

We're buying a few million a month in loans.

If you got 10, 20, $50,000, you will have plenty opportunity to pick an asset and buy something.

But I think where a lot of people get stuck is they want the perfect loan.

And that's not going to happen.

The perfect loan for the perfect price, you know, if you want try and you know, get higher returns, it's going to be higher risk, there's going to be more hair on the asset.

Just like a house, the more renovated the house, you know, the higher the cost.

Of course, always do your due diligence.

You know, we talk about the three Ps, the person, the predicament, and the property.

And just ask yourself, is it worth the investment?

And really do that due diligence.

Now, it's great that I spit out all of that, and we've talked about that in the past.

But here's where I think I really break down the answer from now to then, because it was much easier to have the funds back then.

Today it's not so easy because notes are more expensive today.

Maybe you're ready to invest, but you don't have 30, 50, $100,000 or more to buy a note outright.

A lot of tapes we see now, it's very rare to see a balance under $50,000.

Back in the day, almost every tape I was chasing had balances less than $50,000.

So here are some smart real world ways headed into the game and sometimes maybe not doing it alone.

Option one, partner with somebody else.

I don't know why it's interesting because the space is not competitive in the sense of, like real estate, where, you know, you don't want to show your secrets or whatnot.

But in the same token, I'm not sure why more people don't partner.

I know there's a group of women out there who partner on loans and they each put in, you know, 10, 20 grand or whatever that number is, and they're able to buy an asset.

And each one has a specific skill set that they work together.

For some reason, I find, you know, and I'm not meant to say this in any negative light, I find in this industry, women work better together than men.

I don't know if it's an ego thing or what, but, you know, that's something I see.

And there's plenty of opportunity there that you could partner with somebody and find the deal, manage it.

And I'm not talking a jv, where, you know, this other person's kind of in the sidelines.

It's two people who want to be in the space.

It's like, hey, let's join forces, work together, learn through this together.

Now, each put in 20 grand, split the profits, you know, and go on our way.

So that's one area where I think you could get in.

Another is, you know, buying a partial note, which some sellers are for partials, and you buy, you know, five years of cash flow.

I used to do this frequently.

I used to have over 75 loans that we had sold partials on.

Now that we have our fund, you know, that's not the case anymore.

We're not selling partials in that sense.

The one thing I'll mention about a partial and some people use term partial, some people use hypothecation.

Understand your role.

Are you managing the note or is that other person managing the note?

If it's that other person, you're not really going to learn a lot.

You'll basically get some cash flow in the door, but it's going to be much more passive for you.

And if you're really looking to learn, I'm not sure it's going to fill that cup.

So if partials don't fill that cup, what can fill that cup?

We mentioned the, you know, partnering, we mentioned other avenues.

The other asset class that does have lower price notes is land.

And some areas of the country that have some manufactured homes, you can see loans in those areas that again are going to be in a market where you can buy loans for 5, 10, 15, $20,000.

It will be much higher risk.

Just calling out their land is going to be a higher risk than a single family because it's more illiquid.

You know, people can't live in a land, People can live in a house.

So there's going to be more people wanting that property if it goes to foreclosure, have to take it back.

And land, it's going to have to be most likely an investor that wants to buy that because it's probably land that's a little more rural and there's not people chomping at the bit to go build a house, especially today in today's economic environment.

But there are a lot of people who, you know, like to buy land or own land and will pay.

You can get it at a servicer, you can learn the process.

And I think that's really important to understand the boarding process and the other aspect of note invest investing of just having your loan at a servicer.

But also realize after that process it's pretty boring because you gotta wait every month see if that person pays or not.

It's not like you need to watch your loan every single day.

I did that when starting out.

I don't know why I would just go in and log in and some of them are not performing.

But I'm like, why am I doing this?

Should be looking at other loans or whatever else is going on.

The other option, which again I know people do, I don't typically recommend this is buy a second position mortgage, which again typically sell for more of a discount, typically lower priced.

The reason why I say I don't typically recommend it is if you do have to foreclose.

How are you going to deal with that first position loan?

Or if that first position loan goes to foreclose, do you have the funds to pay it off or to reinstate it?

And most people getting started do not.

So that's the reason why it's nothing with them, you know, not being a good loan or whatever the case may be.

It's all about how much money you have.

I know people are very successful in the second note space and do really well, but they also have money behind them as well.

So some final thoughts.

You know, let's recap.

You know, a decade ago, as I mentioned, you could find these smaller notes all day long.

And today's inventory has shifted, but that opportunity is still out there.

And we have some notes in our portfolio that we're selling right now that have balances below 50 grand or can be acquired for 50,000 or less.

Can you find stuff now for 5 or 10 grand like you could a decade ago?

It's just a lot harder.

But you know, again, you're probably looking at land.

It just takes time and hustle and recognize.

Real estate, including note investing, is not a get rich quick scheme.

If you have $25,000 and you buy a performing loan, great.

You make 2,500 bucks a year.

$200 a month, I think that's great.

I know people who sometimes though, see on Instagram or YouTube somebody telling you how to make 250 grand your first year.

Unless you have spent your career in marketing, sales and have a really good network of people with a lot of money, you're not gonna get there.

It's just reality.

First few years of note investing, you should plan for long term and take all the money you make.

If you make any in the first year, reinvest it.

It wasn't until the third year I was involved in note investing that I really saw substantial gains because I was reinvesting, you know, that money and that time and you know, systems processes, you know, a little bit here on training.

I was reinvesting it because I wanted this long term and put a plan to grow.

And you just don't grow from 0 to 100 loans overnight.

It takes a lot of time and commitment, which I feel like I've done.

So for those getting started today, yes, it's harder.

Just like it's harder to buy a house and afford a house, it is no different.

But here at 70, we are here to help.

And if you're interested in more information on how we can help, we have a very small membership group.

We provide a lot of free content.

We're hosting a conference called the Paper Trail Conference in September in Chandler, Arizona.

Go to papertrailconference.com and check us out on YouTube.

We've got so many tools, resources, strategies to help you move forward no matter where you're starting from.

So thanks for listening to the Paper Trail Podcast.

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Take care.